You may be considering the merits of an option agreement on property you own, or on property you intend to buy. Either way you may be wondering how long the option agreement can last.
So how long does an option agreement last on a property? An option agreement on property typically lasts between three to five years. But the period of the option agreement can be shorter or longer by mutual agreement from both parties. Also, many property option agreements include a right to extend, should this be needed towards the end of the option agreement period.
With that said, the time period an option agreement lasts will be determined by the type of property transaction in consideration. Let me run through a few property transactions that might benefit from using an option contract.
Land and property option agreement examples
To understand how long an option agreement should last, examples of land and property deals will be the best way to explain this:
- Option agreement on land for development.
- An option to buy a property.
- Assisted sale option agreement.
Let’s take a look at each of these land and property option agreement examples in more detail.
1. Option agreement on land for development
A land option agreement provides a set period of time where a developer has an exclusive right to purchase the land. This set period of time is used by them to explore development opportunities on the land.
During the land option agreement time period the seller is not permitted to sell the land to anyone else.
The length of time a land option agreement needs to last is to allow for enough time during which the developer has time to submit and receive confirmation for any planning applications.
Thus allowing the developer time to obtain planning permission and to buy the land in preparation for building the development.
An option agreement on land needs to be for at least 12 months, but more realistically to last 18-24 months.
Planning applications can take time to be processed by planning departments. Also, there’s no guarantee the planning application will be accepted.
The option agreement therefore needs to allow time for the planning to be accepted. But also, and if necessary, long enough to allow for planning application refusals and appeals.
If planning isn’t granted on the land for the proposed development, the developer simply doesn’t exercise his option to buy the land.
But also, if the planning process ends up taking longer than expected, and the option contract period is coming to an end, then so long as there’s a clause to allow for an extension, the extension will be invoked.
2. An option to buy a property
An option to buy property is often combined with a lease payment to the seller. This type of option provides an opportunity for them to sell their property, which they may otherwise struggle to sell.
Options to buy property also work with selling property portfolios. In both cases the option holder takes on the responsibility for the property.
Where an option to buy property is combined with a lease, this is called a lease option.
Most lease option deals tend to last for between two to five years. But can be much longer. However, the option period cannot be set to longer than the term left on the mortgage on the property.
The reason why an option contract cannot extend beyond the end of the mortgage term is because at this point the mortgage is due to be repaid.
Most property owners repay their mortgage on a monthly basis or at the point they sell their house. Which means the option holder needs to exercise their option before the mortgage term expires.
Lease options are a great way to provide a win-win for property owners to achieve market price, but so long as they are happy to wait. But with the benefit of receiving some or all of the equity in the form of an option fee at the start of the option contract.
3. Assisted sale option agreement
Another property transaction that benefits from the use of an option contract is an assisted sale.
In this case, the option agreement needs to last for a period that’s long enough to do whatever is necessary to the property in question and for it to sell to a third party.
Typically an option agreement for an assisted sale should last between 12-18 months. But this type of agreement should almost always include a right to extend. This protects the option holder in the case where the property may take more time to sell than anticipated.
Are there any option agreement pitfalls?
Option contract pitfalls include the fact that a seller has given an exclusive right for the option holder to buy their property at an agreed price over an agreed period of time to the exclusion of others.
Another pitfall for a seller is if the price of the property increases above the amount set in the contract.
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