Blurring the Lines – Is a Conditional Land Acquisition Contract an Option in disguise?

When buying or selling development land, one of the first questions the parties will be asked by their solicitor is “Is this an Option or a Conditional Contract”?

Both are contracts which oblige the parties to do specified things. If implemented, both will result in the sale of land by the seller to the purchaser. But the distinction between these two types of contract is not as clear cut as it may first appear.

A conditional contract is an agreement for the sale and purchase of property which is dependent on one or more pre-conditions (often referred to as suspensive conditions) being satisfied. A common example of a suspensive condition would be the grant of satisfactory planning permission.

Once all of the suspensive conditions have been purified - normally by the purchaser - the contract becomes unconditional and binding, with both parties obliged to complete the transaction.

By contrast, an option agreement gives the purchaser the right, but not the obligation, to purchase the property within a specified period. The seller is bound to sell if the purchaser exercises the option, but the purchaser is under no obligation to exercise the option. For those familiar with “Put and Call” option terminology, in an option contract there is a “Call” but no “Put”.

On the face of it, an option agreement tends to be perceived as preferable from the purchaser’s standpoint, but this is not strictly true. Over the years, the wording of suspensive conditions in conditional contracts has become far more finessed, with purchasers’ lawyers seeking to introduce a significant degree of purchaser discretion and sellers’ solicitors doing their best to push a purchaser to an end position.

The majority of conditional contracts contain longstop dates by which suspensive conditions require to be purified, with both parties having the right to terminate the contract if any suspensive conditions remain outstanding at that time. As such, a purchaser is unlikely to have a gun put to its head by a seller to buy a site. At worst, it has to walk away from the purchase, losing the (not insignificant) sums it has invested in promoting the site and seeking planning permission.

A conditional contract often operates in a similar way to an option agreement in that it is generally the purchaser who holds the cards in terms of deciding whether or not to proceed with a site purchase. Over the years the lines between the two types of contract have become less defined, but in defence of the purchasers, they are wrestling with significant uncertainties created by planning delay, construction cost inflation, statutory changes and the like, which all impact on the viability of a site.

There have never been any guarantees that a site under a conditional contract will be purchased. If a purchaser wants to buy a site then it will inevitably do its best to do so. A seller under a conditional contract would be well advised to secure a known end-date to the contract, a contribution towards legal costs and the benefit of any planning permission which has been granted.

The following factors may be relevant in deciding whether a conditional contract or an option agreement is more appropriate:

Duration: Anything longer than 3 years between conclusion of the contract and completion of the sale would lend itself more to an option agreement as this suggests that a longer period is required for promotion of the land prior to making a planning application.

Security: It is more common in an option agreement than a conditional contract for the seller to grant the purchaser a security over the land. This is invariably described as a “flag in the ground”, ensuring that the land can’t be sold or transferred without the new owner being obliged to accept the terms of the option contract.

Option Fee/Deposit: In an option contract there may be an option fee payable by the purchaser and/or a sum towards professional costs. Both can be deducted from the eventual price if the option is exercised. In this way the seller has at least avoided up front costs without any prospect of being compensated by an eventual land sale. It is less common for there to be any deposit paid to a seller under a conditional contract. All depend on market forces and the parties’ respective negotiating positions.

Site assembly: Where a purchaser is assembling a site from multiple landowners and requires flexibility, an option contract may be the preferred alternative.

Purchaser obligations: what are the expectations on the purchaser? Will it be actively pursuing the promotion of the site and the obtaining of planning permission? Appropriate provisions can be included in both types of contract with progress dates and updates given.

It will be for the seller and the purchaser to agree whether they will enter an option agreement or a conditional contract but at the end of the day, the difference between the two may be minimal.