Option Agreements are a legal contract between a landowner and potential purchaser of a site, typically a housebuilder. The housebuilder essentially has an opportunity to buy the site from the landowner through a valuation mechanism to determine the purchase price – normally with a discount from market value. The purchase would take place within a fixed time frame once the terms within the option have been met – usually a challenge free Satisfactory Planning Permission.

An Option Agreement benefits both landowners and housebuilders: a landowner has the comfort of a housebuilder promoting their site for development and the housebuilder has some security with regards to future pipeline for delivery. They also have control of the planning process to some degree as they can ensure the final product matches their own requirements.

The terms of an option tend to relate to planning, with the agreement allowing time for a site to be promoted through the planning process and for a Satisfactory Planning Permission to then be obtained. Once this happens, a Price Notice is normally served to the landowner, which then triggers the price negotiation process and the purchase of the site through an Exercise Notice. 

The purchase price typically reflects a percentage discount from the market value at the time of exercise, often also including additional deductions for an option fee and planning promotion costs. The process of agreeing a price can be difficult because the value is not determined by competing bidders on the open market. 

Instead, the landowner and housebuilder negotiate the potential market value of the site – taking into account costs of the development and the housebuilder’s profit. Local market conditions and comparable land transactions also need to be analysed. A minimum price provision within the agreement will prevent a sale unless a certain price threshold is met.

If the landowner and housebuilder cannot agree on a purchase price they will often have to undertake a process of independent determination.

This normally involves the appointment of a suitably experienced independent expert or arbitrator who is also a chartered surveyor. The expert can either be agreed between the parties or appointed through the RICS.

Generally, both the landowner and housebuilder will submit written representations to the appointed expert that detail the market-based evidence and appraisals used to support their assessment of market value. There is then usually the opportunity to provide counter representations to the expert based on what the other side has submitted.

There are often strict timescales that need to be adhered to throughout the process, so it is essential that both parties are properly represented and that each submission is as robust as possible.

The expert or arbitrator will then determine the purchase price, with the housebuilder able to decide whether or not to purchase the site at the determined price.

Further information

Contact William Newton

Contact Savills Planning