Option Agreements – Purchasing land

Imagine a developer identifies a plot of land he or she believes has significant future development potential, but obtaining planning may not be guaranteed. The developer may be apprehensive about buying the land, but they would still want an interest in the land to give sufficient security in order to outlay planning costs. Similarly, landowners with a parcel of land suitable for development may wish to obtain planning on their land to realise planning potential, but they would not want to pay the planning costs themselves. What are the strategies that can be employed by both landowners and developers to assist in such land deals?

Option Agreements

A developer and a landowner can enter into an Option Agreement, which gives the developer the option to purchase the land (usually at and agreed sum, or at market price less pre-agreed deductions) and the ability to obtain planning, without the risk that they will be compelled to acquire a parcel of land without the benefit of planning. Entering into an Option Agreement can also benefit landowners as they can realise a higher price of their land without having to put forward their own funds in obtaining planning.

How are Option Agreements useful to developers?

The most common form of Option Agreement (known as a “call option”) is useful for a developer in exploring the viability of the potential development.

Often in return for paying an option sum, the developer can exercise their discretion as to whether they wish to purchase the plot of land. The developer can then apply for planning permission, knowing that if the planning application is unsuccessful, he or she is not obliged to buy the plot of land, but that if planning is granted and produces a viable scheme they have the ability to acquire the land on known terms.

An Option Agreement is registrable by way of notice with the Land Registry, which provides protection to the developer if the landowner sells the land to a third party.

How are Option Agreements useful to landowners?

Call options are useful to landowners as they can put forward their land for development without having to go through the complexities and costs involved with obtaining a planning permission. The added benefit to landowners is that the price payable for the land under the option is usually based on the site being a viable development site, and therefore the land will benefit from a higher price reflective of the planning potential.

A different form of Option Agreement (known as a “put option”), can also be used which gives a landowner the ability to compel a developer to buy the land. The landowner may be required to pay the developer an option sum, but there is no obligation on the landowner to sell the land.

Unlike a call option, a put option does not create an interest in land and so cannot be registered with the Land Registry.

Is it possible to combine a put option and a call option?

Cross options, or put and call options, arise when a developer is given a call option in return for which the developer grants the landowner a put option. This form of Option Agreement may be useful where a developer identifies a specific plot of land it may wish to purchase in the future, but the landowner wishes to compel the developer to purchase the entire plot of land.

What are the tax implications of an Option Agreement?

The law states that the acquisition of an option to purchase land is in itself a land transaction – meaning a developer will be required to adhere to SDLT requirements on both the Option and any subsequent Transfer of the land if the consideration paid on each part of the transaction is above the notifiable level (currently £40,000). A developer should also be wary of any VAT implications, by ensuring the option sum is either VAT inclusive, or is exclusive and the VAT treatment of the land is known at the outset and warranties are given that this will not be changed by the landowner during the course of the Option Period.

A landowner may incur a liability to Capital Gains Tax, as an option is treated by the law as an asset which is disposed of in consideration for the option sum.

If you are either a landowner or developer looking to enter into an Option Agreement or any other land transaction please contact our Real Estate team on realestate@herrington-carmichael.com or call 01276 686222.

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.