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The differences between conditional contracts, option agreements and pre-emption agreements
When selling or buying land, you might hear the terms “conditional contract”, “option agreement” or “pre-emption agreement”. Whilst these all essentially involve the sale of land from a seller to a buyer, there are significant differences.
A contract might be conditional on various matters but the most common condition is the buyer obtaining planning permission for a particular use. If the buyer obtains its required planning permission within the time limits set out in the contract, the contract will then become unconditional and both parties will be obliged to complete the sale.
The contract will set out detailed provisions regarding the type of planning permission to be obtained, the timetable for applying for it and (if necessary) appealing against either a refusal or any “unreasonable” conditions imposed on the permission.
A buyer will want as much control as possible over this process, so that it is not obliged to complete the purchase if it does not obtain planning permission in its required form, or only subject to unreasonable conditions, or not within its required timescale.
On the other hand, a seller will want to make the contract as water-tight as possible, to avoid the buyer being able to get out of the contract.
An option agreement differs from a conditional contract in that neither party is under an obligation to complete the sale unless the “option” is exercised. Under the terms of an option agreement, it is for the buyer to decide whether or not it actually wants to complete the purchase at some point in the future (but during the period specified in the option agreement).
A buyer could therefore enter into an option agreement and at the same time, for example, apply for planning permission in respect of the land. If the buyer obtains a satisfactory planning permission during the option period, it can then decide whether or not it wants to exercise the option and purchase the land. Unlike a conditional contract, it does not have to buy the land just because it has obtained the planning permission. This would be preferable where the buyer does not already have funding in place, or if it has alternative land in respect of which it has also applied for planning permission.
An option agreement is less attractive for a seller because it is out of the seller’s control whether the sale will actually complete. Whilst the land is tied up in an option agreement, the seller is unable to dispose of it to another buyer. However, the buyer will usually pay a non-refundable deposit for an option agreement and so, depending on the amount of this, it can be worthwhile for a seller who is not in a hurry to sell the land.
A pre-emption agreement is almost the reverse of an option agreement. In this case, it is for the seller to decide whether or not it actually wants to sell the land. If it does, the seller must first offer to sell the land to the buyer, during the period of the pre-emption agreement.
The agreement will set out a timetable for service of notices and acceptances. If the buyer does not accept an offer notice during the period set out in the agreement, then the seller is free to sell the land to another buyer at the same (or a higher) price.
In the case of all these agreements and depending on the circumstances, the purchase price might be fixed on exchange of contracts, or the agreement might contain provisions for the parties to agree the open market price at the time of completion (to be determined by a surveyor if it cannot be agreed).
We would always recommend that both the seller and the buyer take advice from an independent surveyor and an independent solicitor before agreeing or signing any binding documents.
For further information please contact Victoria Sandberg in our Commercial Property team.
Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.