Option, exclusivity or conditional contract?
Sellers and buyers alike want to lock in a deal as soon as possible.
Often, that will be before either the reason why the purchaser wants to purchase the property has come to fruition, or before full legal due diligence has taken place.
There are several approaches available to both sellers and buyers to provide comfort for each party in a proposed deal at an earlier stage than might ordinarily be the case. These include the following:-
A. Exclusivity Agreements
A seller can grant a buyer an agreement which legally binds the seller not to enter in to any negotiations with or offer the property in question for sale to any other party for an agreed period of time. The buyer is given the comfort that during that period, it is the only proposed purchaser to whom the property is being offered. During that time, the buyer can carry out its preliminary investigations as well as incurring the costs of full legal due diligence.
During or on expiry of the exclusivity period, the buyer can enter into a contract to purchase the property having undertaken all the investigations which it considers necessary to determinate the viability of the transaction, without the worry of any other offers for sale or the prospect of a contract race. The seller has the comfort that the buyer is sufficiently interested in the property to conduct its investigations during this time period and can often, as an extra level of comfort, negotiate the payment of an exclusivity fee from the buyer as consideration for the agreement (whilst not a topic for this article, such a payment might carry VAT implications).
B. Option Agreements
A seller can grant a buyer an option agreement, giving the buyer the right to purchase the property within a specified period of time. There are different types of option agreements:-
• a “put” option, whereby the seller serves notice on the buyer requiring it to purchase the site; or
• a “call” option, where the buyer serves notice on the seller calling for it to be sold to it.
Option agreements can be quicker to enter into than conditional contracts, although full due diligence on behalf of the buyer is still strongly advised ahead of entering into such an arrangement. There are various ways to structure an option agreement. For example, during an agreed option period, the parties might agree that a buyer is under an obligation to apply for planning permission following which, if satisfactorily granted, the buyer serves notice and “puts” on the seller an obligation to sell the property with the benefit of the planning permission. Within such an option agreement, and should planning permission not be granted, the seller can “call” on the buyer to buy the property without the planning. Each scenario would have agreed but different sale prices.
An option agreement can provide both flexibility and certainty to the parties – flexibility insofar as the option notice does not have to be exercised, and certainty that the buyer is going to the expense of, for example, applying for planning permission in the knowledge the seller cannot sell the property to a third party during this option period.
C. Conditional Contracts Parties
Can enter in to a conditional contract, which will most frequently be conditional on the satisfactory grant of planning permission. These agreements can be lengthy, and almost always take longer to negotiate and agree than an option agreement. A conditional contract provides that once certain conditions are satisfied, completion of the sale of the property is automatically triggered. It acts in the same way as a standard sale contract for land, save that during the period between exchange and completion certain conditions must be met before completion can take place. There are precise negotiations that take need to take place before entering into a conditional contract detailing, for example, what exactly “satisfactory” planning entails for both parties, and the trigger date for completion. Such contracts require close consideration as to the subject of the conditions, how they are determined, how are they met and how tight they are. Conditional contracts invariably provide more certainty for the seller but less flexibility for the buyer.
We can advise on all aspects of property structuring whether you are looking to sell or buy and if you would like further advise on how best to secure what you want, then please contact Des O’Driscoll on 
0161 819 4912 or at DOD@nexussolicitors.co.uk.
Any and all information which is contained in articles on this website is general information only, and does not constitute legal or other advice. Nexus Solicitors Limited is not responsible for any loss which may arise from the use or reliance on the information on this site. If any topic is of interest to you, please contact us and we will be able to assist and advise you.