You may be new to the idea of property option contracts and in need of some clarification about what makes property option contracts legally enforceable. Let’s take a look…
So what makes an option contract legally enforceable on property? What makes an option contract legally enforceable on property is the consideration in the contract, which represents the amount paid at the start of the contract. Without this consideration an option agreement is not legally binding on the seller. The minimum consideration in an option contract can be as little as £1.
An option agreement gives the holder the right but NOT the obligation to buy a property at an agreed price within a set period of time (the option term).
Which means the option agreement stops the seller from selling their property to anyone else during the option term. Whilst at the same time giving the option holder exclusivity and freedom to choose whether or not to buy.
The difference between an option contract and a conditional contract, which is what most people use to buy and sell property, is that with conditional contracts the seller has more protection.
Which means with a conditional contract the buyer cannot avoid the contract. The buyer in this case has the right AND the obligation to buy the property on the date of completion.
What are property option agreements used for?
Property option agreements are used to prevent landowners from selling land, whilst a developer (the option holder) explores the possibility of obtaining planning permission to build on the land.
This benefits the developer as it limits their risk to the option fee (consideration) and the cost of obtaining planning.
Which is instead of having the risk of investing in the cost of buying the land without any certainty over obtaining planning permission.
Land option agreement example explained using an agricultural field
It could be that the field may be worth several million Pounds with planning permission in place to build houses. But as a field without planning, it may only be worth thousands as agricultural land.
The land owner may not have the knowledge or expertise to obtain planning permission to build houses. But may instead be happy to share in the uplift in value with the developer by allowing the developer, who does have the expertise, to get the planning instead.
The uplift in value an the profit share will be agreed upfront and incorporated into the option contract.
Having the option agreement in place protects the developer from the land owner selling the property from underneath them after going to the trouble and expense of obtaining the planning permission.
But if on the other hand planning permission is refused. The option contract allows the developer to walk away from the agreement (i.e. no obligation to buy). As the developer won’t want to own agricultural land without potential for development.
Other purposes for option agreements with property
In addition to the above example of a property option agreement, they also allow property investors:
To take control of a property to explore change of use opportunities. For example, to change a single residential dwelling into flats. This type of agreement can work well as an assisted sale contract. Which is where the seller will often benefit from the uplift in property value. But without having to pay for the planning fees or for the costs of the development work.
To take control of a property for a period of time to allow the property market to recover. In this case the option agreement will include an agreed price the option holder will pay at some point in the future. This is referred to as the strike price or exercise price. In this case the investor will take on the responsibility for the property. This is done by combining a lease contract with the option agreement.
To take control of property portfolios in order to spread the contractual sale of the properties over several years. The benefit of this arrangement for the property portfolio holder is it will reduce and spread the burden the Capital Gains Tax liability. This type of arrangement also involves a lease contract too.
How do you write an option contract for real estate?
It’s entirely possible to write your own option contract for real estate or property. But you should always take independent legal advice and use a solicitor to draw up your option contracts
Whilst property option contracts are relatively simple agreements, both parties to the agreement should take separate legal advice.
But having said that option contracts are simple, they do require specialist solicitor knowledge to put one in place.
What are the 5 key characteristics of option contracts for property?
The five key characteristics of option contracts for property include the following:
An option fee or consideration: This is usually money and can be as low as £1.
The term of the option agreement.
Strike price or exercise price: This is the amount the option holder agrees to pay the seller if the option is exercised.
Address of the property.
Name and address of the parties to the contract.
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What Makes An Option Contract Legally Enforceable On Property?
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Article written by Russell Bowyer who has been investing in property since purchasing his first commercial property in the 1990's for his own Chartered Accountancy business. But his first property investment project was to turn an old dilapidated restaurant into a large 5-bed home, which he purchased for £117,500 and sold for £450,000 (to see an "after" photo of the house before it was sold see here: About). Russell owns a number of investment properties, which includes houses, flats and HMO's. More recently he has turned his creative side to investing in property using lease options. His largest lease option deal to date was to acquire 12 properties worth over £2 million for just £12, which means he paid just £1 to acquire each property!
