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Conditional Contract v Option
There is often confusion as to what is a Conditional Contract and what is an Option and Sellers need to be aware.
They are two very distinct contractual arrangements although the lines can sometimes become blurred.
In a Conditional Contract the Buyer has to buy the Property if the conditions are satisfied. The most common condition is the Buyer obtaining planning permission for a development.
With an Option it is the Buyer’s choice as to whether it buys the Property, even though planning permission may have been obtained or the other conditions satisfied.
Where the confusion sometimes arises is when the Heads of Terms or the Contract obliges the Buyer to take certain steps to obtain planning permission or acquire third party land, but then stipulates that when planning is granted or the land is acquired, it is to be on terms satisfactory to the Buyer in its absolute discretion.
Such wording means that even if the Buyer takes the steps and the conditions are satisfied, it is still up to the Buyer whether it buys the Property and the Buyer may just decide not to buy the Property for all sorts of reasons not related to its obligations in the Contract. The Buyer will just say that the permission is not satisfactory and will not have to give reasons.
Whether you have a Conditional Contract or an Option, the Buyer will want to place a restriction on the title to the Property. This prevents the Seller during the period of the Contract from disposing of the Property without ensuring that whoever takes a transfer or lease is bound by the terms of the Contract.
So if it’s not a well drafted Contract the Seller could discover that the Buyer was merely looking to land bank the Property so as to be able to promote its competing site. The Seller may have prevented itself from being able to deal with its land for a number of years only to find it has no sale at the long stop date.
However, on the other hand, a developer cannot be expected to have to buy a Property with a planning permission it cannot implement or, if implemented, will have the result of materially increasing the development costs and reducing the profitability of the development.
If a developer is prepared to accept a Conditional Contract then the above concerns have to be addressed. That is normally done by sitting down with the developer and the land surveyors and agreeing with the developer a list of planning conditions or costs which are unacceptable or abnormal and permitting the developer to either try and get those planning conditions modified and costs reduced or to walk away from the transaction.
When negotiating such Contracts it is important to have worked for both landowners and developers and to understand how to draft such contracts so as to give the developer the flexibility it needs whilst ensuring the landowner is protected.
If you are a developer or landowner considering an option or conditional contract for land, give us a call on 0800 470 0331. Our commercial property experts will be happy to assist.
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