What is an option agreement in property development and how does it work?

Why use an option agreement?

• Flexibility: developers can apply for planning permission before committing to purchase.
• Risk management: if planning is refused or the project isn’t viable, the developer can walk away.
• Time to secure funding: developers can the breathing space needed to arrange for finance or investors.

Whilst these points may not be ideal for the landowner, a non-refundable option fee is payable on exchange of the option agreement to provide fair compensation. It reflects the buyer’s right to complete the sale and recognises the uncertainty and temporary restrictions that the landowner faces while the property cannot be sold to anyone else. This fee is often deducted from the agreed price for the land should the option be exercised.

Key considerations

When entering into an option agreement, it is important to focus on:

1. Option period – ensure there is enough time to secure planning without tying up the land indefinitely.
2. Option fee – clarify whether it is refundable and if it counts towards the purchase price.
3. Purchase price – decide whether it is fixed upfront or linked to future market value.
4. Planning obligations – who is responsible for applying and paying for planning?

In most cases, the developer will cover the costs of the planning application. This is part of the risk a developer takes – if permission is refused or the project does not proceed, those costs are usually lost.

Commercial Property specialists

A carefully drafted option agreement protects both the developer and landowner. Our Commercial Property team advises on structuring agreements that are practical, clear and legally robust, helping to avoid costly disputes down the line. Get in touch with our experts today.