Options - Careful With Your Drafting

When an option to acquire land is being negotiated, it is important to be careful with the drafting of the option agreement, lest you create unintended consequences.

A recent case illustrates how problems can arise if the wording of the agreement fails to be comprehensive. An option to purchase land was granted to a developer. The developer intended to obtain planning permission to develop the land and, if the application was granted, was expected to exercise the option to purchase the land.

The option agreement required the developer to apply for planning permission for 20 apartments and gave it the right to buy for either £875,000 or £925,000, depending on the decision of the planners as to whether over ground or below ground parking was allowed.

The developer paid £1 for the option, which lasted for six months. The term of the option was to be extended if the developer's planning application was refused and the developer appealed against the decision or if planning permission was granted on terms not acceptable to the developer. The problem was that in such circumstances the option ran until three months after the determination of the appeal against the planning decision, but did not have a long-stop termination date. The statutory limitation on options is 21 years.

The developer did not obtain the planning permission sought and, shortly before the option agreement expired, it appealed against the refusal. The developer subsequently asked the planning authority to put its appeal into abeyance, with the effect that the option was then left 'live'.

More than a year later, the developer submitted various other planning applications with regard to the same land, one of which was granted. It then sought to exercise its right to buy under the option and the landowner refused, arguing that there was an implicit term in the agreement that the developer would use 'best endeavours' to obtain planning permission and that this had not been done because the permission had not been pursued for a year.

The landowner lost.

"Options present significant problems and tightly drafted option agreements are a necessity," says Aston Bond. "One particular problem which can arise if you are not careful is that if the timing of the receipt for the option is out of your control, this can create tax or other problems and the presence of an option can cause problems when financing is sought using the land as security. In general, it is usually to be preferred if the buyer of the option pays a realistic sum up front, as in practical terms that will concentrate their mind on getting the deal done."

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