Webinar
Option Agreements
Option Agreements
As the effects of the current pandemic continue to be felt in all aspects of our lives and business, the real estate market will take a long time to recover. As the UK starts to move from survive mode to thrive, we take a look at the options available to you as a landowner, a developer or as an occupier to ensure that your real estate strategy is working for you.
In this webinar, we look at:
- Option Period and Option Fees
- Land assembly, valuation and minimum price
- Price and exercise notice
- Ransom strips and retained land
- Vacant possession
- Option Agreements Post COVID-19
Please do let us know of future topics that you are interested in, or for more information about our webinars please contact us and you can view past webinars at SHMA®ON DEMAND.
Lucy Haynes
Partner
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Webinar transcript
(Please note this is auto-generated and un-edited)
0:40
on Lucy Haynes, an associate in the infrastructure and especially markets team here, Shakespeare Martineau. Welcome to today's webinar on option agreements, say, before we start, just a few points on how this online session will work. On your screen, you'll see a Q and A icon. Please use this to ask your questions, and we'll respond to these domain after the session. So, this webinar is going to cover, what an option agreement is, option period, an option face. Some points on land assembly, valuation, and considerations for minimum price.
1:19
Looking at the price notice and ..., some thoughts around advancing strips and retained land, how to sort of secure vacant possession, and the things that you need to consider. And then, just sort of, a touch on option agreements, in a post ... setting.
1:38
The webinar is designed to give a brief overview of option agreements, and some key points to think about. So, of course, there are other elements which you may want to include a, particularly in more complicated setter. And there's you know quite a few planning considerations that we could go into more detail on on handbook. But that's really for another day. So what is an option agreement? An option agreement is a contract between a landowner and a potential developer where the developer has the opportunity, but not the obligation to purchase the property from the landowner, and that will be us an agreed price or an agreed price calculation within a certain timeframe. And the price is generally discounted at market value.
2:23
That can be used in many circumstances. And then generally used really where an area of land doesn't yet have planning permission. But there is the potential for it. And it also allows time for planning to be obtained through the planning process, and also any other potential soft tissue. So things like total matters or site contamination, and they can be resolved through that process. The key point, really is that it is an option, not an obligation for the developer to purchase.
2:55
So, first, we're going to take a quick look at an auction period, and face, so that you first consideration babies. How long do we expect the option to last? Now, these combined from anywhere, really, from a short periods, for example, to three years, to much longer periods of 15, sometimes even 20 years, possibly, longer. And much of this is going to depend upon your planning strategy, market situation, time, how large their land days, how many Londoners are involved. And so, for example, there's a large area of land, which hasn't yet been allocated planning. That might require a longer period, so that you can get the land dedicated for development. And then the developer can look at submitting an application within that timeframe when the time is right.
3:45
And you'll also want to have to think about extensions, and whether these are appropriate, so this to sort of types of extensions to really think about here.
3:55
I think that the first one is where you have looked at whether or not you want to extend the actual option period itself. So, say you have an option period running for a period of five years, you might say, OK, I'm going to agree to a further extension of five years. And that can either be on payment for additional fee and just pay me to an additional fee. Or you can have known a certain set of circumstances. So, for example, if the land has been allocated, you might say, OK, well, it's allocated, I'm happy to allow you wanted to five years to do this on payment of that further.
4:33
The second sort of thing to think about then is planning extensions. And this really comes in if, say, for example, you've you've submitted your putting application, but you're right, it's sort of the end of the option period. You timed out, you don't get tough decision from the local authority. So you kinda reasserting set of planning extensions in those circumstances. And so, effectively, the option agreement is extended until such time as decision is received, and that consent is free from challenge, so that you can then move on to the next elements of the option without being timed out.
5:10
In respective option phase, you want to consider whether or not you're going to charge an option. Failures on donor. Some agreements will provide for payment of, say, £15,000, and for that ability to enter into the agreement and its arrangements, because that's going to compensate the landowner for tying up the land for that period of time. And generally, this is page on.
5:34
Know on exchange of the option agreements, so, they get that money upfront, caught early on. And, really, you want to consider, as well, whether or not the Extension fee is going to be payable, as we sort of touched on before. And, then, you need to consider whether or not these elements are going to be deductible from the price, or whether that go into the in addition to the price paid for the property. So, you post calculation at the end. Do you might say actually you know that because you've already paid £15,000 towards this and thought it'd be knocked off the price at the end or you say No, it's £15,000 plus the price that we're great for the property.
6:15
You also want to consider whether or not there are any circumstances where the option fee might be refundable. Generally that not bought, you might have sort of an issue where there's the ... site claimant's condition or there's some sort of total issue on the property. And you might decide a catchy we're going to have a period of many months and to sort this out first before we impose the planning obligations. And if that can't be sorted than the term possible client and that they will be refundable to the developer.
6:48
And so the next thing we need to consider is a sort of lambda assembly, and the key things to think about here really relate to whether or not there's going to be multiple landowners. And all was a, you know, how big yolanda's. So, the first point, equalization, you want to look at whether or not there are multiple landowners or was it or not you're going to add the pulses of London in the future. And if you're going to do that, is the land value going to equalize dose as a whole? As a development site was a benefit planning permission? Or are you going to look at valuing the land individually? And then the next thing to look at is a trench drawdown. So they sort of comes at the end. And because particularly in respective sort of larger sites, you want to consider with, the developer requires an ability to draw that landowning trenches and because then they can size that development accordingly.
7:40
So, looking really at valuation, this sort of leads on from before, rarely. So, you want to think about whether or not you've got a standalone or a clause valuation. So, multiple landowners are valuing each piece of and vigilant on its same. Or are you going to equalize the value over the site.
7:58
And you also need to look at the method evaluation. So is it going to be a short form, red book valuation? Or you're going to look at a long form, residual land valuation. You'll also want to think about what's going to be deducted. In particular, here was sort of thinking developers costs. So promotion costs, costs of any infrastructure that's going to go in, at this point, before they purchase cost of any legal fees, and title, insurance, all that sort of thing. And then finally, what percentage discount, you're going to allow for that for the property?
8:39
You also perhaps want to think about minimum price, particularly. Hey, we're talking about landowner. And so, Is there going to be a minimum price that, you know, you do your calculations? But if it doesn't hit that minimum price, then you don't sell to the developer. This can be done by reference to area.
8:55
And so, thinking about you, know, what's what's been consented and what hasn't or it can be done as a fixed some, so you might say as landowner, OK, I'm happy to sell my stock for a million pounds, and that's that's What I'm Happy with the forget more greater, but I'm not going, You know, any lower than a million pounds, and that's your fixed some. It's important to consider an ability to waive that minimum price provision, particularly really wet. Market conditions perhaps, aren't great, but the London would still like to sell the land. It would be good then that they can waive that minimum price and particularly, if you know, sort of offers are coming in just below that minimum price threshold and they're still happy for, for the land to be sold at that price. And that kinda leads us on ready to the minimum return. This really is quote.
9:50
Sort of, it's more significant in the promotion sort of setup, but it might be that a developer says, will actually, all you need to make this much money on, I need to. Well, I can't pay any less than, sorry, I can't pay any more than this, because it just won't be viable for my scheme.
10:10
And I think particularly at the minute that, that's something that, you know, developers are going to want to be looking off, because they need to make sure that they come actually didn't it for the scheme of the price.
10:20
They are paying for the property and then, you've got sort of, so what was, once. Once you've got your price agreed, and you're happy with that.
10:32
What, what happens next year? You got your Planning Commission, Sorry Amanda, what happens next? We go onto price, on how that's dealt with. So, services, you probably noticed, that's the first point that we look at really here, and if it's a fixed price, you know often that, that went really come into it. But if it's a fixed price and you've got certain deductions, so planning costs, etcetera, It might be that you have a provision to the price notice. And list those deductions, but it really comes into play. where you've got a book or some other sort of valuation, and here you have a provision for the types of that price notice and setting out, you know, what price they believe, it will be in accordance with the calculation in the document. Also, providing evidence for that. And then there will be a telling sign than for the parties to agree that price.
11:30
And then if the parties conjugal the price, then you'll have a referral to an expert and the expert will determine the price for that property.
11:39
Um, so, once you've either got your agreed price or the price has been determined, and this is the point, then, that the developer can decide whether or not they want to purchase the property. So, this is sort of your legally binding contract to purchase the property. Up until this point, developer isn't, isn't obliged to purchase a property. Now, if the price has been negotiated between the parties, hopefully, we have to adapt, and they'll perhaps excise noticed, if you've got a situation where, actually, the experts determine the price and, you know, the developer can, therefore say, Well, actually, I don't like the price, it's been determined, and, therefore, I'm gonna walk quiet stage. Hopefully that won't. Hopefully we'll get to the point where you have your exercise notice. And you can have some sort of provisos on this. So, for example, you can have well, you can only serve and excise notice, in respect of the land that you've stepped process, or you can only serve ... which is actually in respect to the whole.
12:41
Because I want you to take the whole of the property, irrespective of whether or not it's got planning permission. And it may be that you'll have several exercise. Notice if you've got sort of Jordan's in trenches. And you might have several exercises served at different times.
12:55
So for example, you serve warning respect to Phase one, and then the second one comes with six months after and purchase a Phase one, for example. So some of the considerations, really to think about and run some strips are generally sort of a landowner requirement. And it's really where they're sort of land next door was there's a potential for development. And it's looking at retaining them, run some generally by the landowner. And so that if services have to come threes on into sort of the development on the property, and then you've got the ability to, to create around some situation. And now you need the flexibility built into this, because generally, you know, these days you won't have a soil out or anything. So, you won't be ability to relocate the phantom strip them, if necessary, and you might want to consider, as well, whether or not the developer is going to get any share of any ransom volume.
13:58
Thinking about retirement land. So, these would be, you know, went about printing boys part of the property pumps and part with the current plan and consent, But there's still potential for that retain land to be developed. And you might want to think about what rights you want over the development site, whether you want rights of way rights to connected services. And possibly can even go so far as to put obligations with developers to bring things up boats and services to the boundaries, so that you can connect into them. And also upgrade to upgrade and in respect to services aren't on roads whaling.
14:37
And you also want to think about what point the auction extinguishes. So if developers only buying part of that property has, the option now extinguished on the rest of the land or you're going to give them a second bite of the cherry.
14:53
Say, the requirement, really, for vacant possession is crucial, particularly for developer when when you securing a site, because you need to be certain that there are no other interests affecting that summit and affecting the development. And, in particular, you know, any onward sales and purchases. And this can be dealt with really by considering the management of tendencies affecting the site and a restriction on the grant of any sort of new tendencies. And so, you know, you might want to think about, OK, will only allow certain types of tenancies Or certain timeframe with the tendencies or, all of them have to have Navy ability to break within three months. Or, I only want tendencies on this part, the land, because actually, that's going to form phi 2 phase 2 of the development. So I won't need that immediately.
15:41
Then you want to think about really what's, what's actually on the property at the minute? So are there any existing tendencies? As party due diligence, and do they need to be rectified? So is there somebody on the property at the minute that it's using the land? But they don't have a formal tenancy agreement in place. Now's the time to put that formal agreements in place.
16:01
And then, really, it's all about your vacant possession strategy, and particularly your timescales. So do you need the landowner to to serve notice in respect of any tendencies at a particular point in time? So it may be that you say, right And you can grant these types of tenancies. These are the current tendencies that are on the sites that were happy with those. However, you got to serve notice on all tendencies as soon as we get punished. So that even though you can get vacant position when you purchase the property.
16:30
So, really, this, this sort of, that was a whistle stop tour between an option agreements. And what I just want to touch on now is, is looking at an option agreement in the context of a post covert 19 settings. So, we've only really at the very early stages of determining what the impact of the gun will be on development, and in particular here, what we're thinking about strategic development work now, mostly. We had the temporary staff development development sites, that developers are now sort of slowly going back on-site, but it does remain to be seen how they're going to be able to meet the demands on their current sort of build plan. In addition to implementing those required social distancing measures.
17:13
An option agreements really provide quite a valuable way for developers to come up with a strategy for development. And in particular really we're thinking about sort of the long term development plan. But also, kind of that flexibility in respect of dealing with more instant transactions. I mean, we've seen a break sort of on instant lung transactions and develops and thinking more and more about whether or not they can enter into those at this time. And this really gives the opportunity for the option agreement. Because you before you get to this point, you've got all that hard work of sort of, looking at the planning looking at and what you can know. What strategy you're going to develop? There's been a lot of hard work really before you get so that's sort of. Right now, we're ready to enter into a legal agreement stage.
17:59
And so this really gives you the opportunity to develop on that and sort of thing. OK, well, we're not going to tell you that business into purchased Islam now, but we can have a very, very short option agreement could be telephones can be 18 months. Whereby, you can see what the, what, the less land is in sort of six months time, and whether or not we can actually move forward with this, but at the same time, and they were still secure. Having done that land and potentially for us to develop in the future. So, you know, it's also looking at whether or not that the entrepreneurs market. Hey, you know, we've, we've seen that slow down and for developers wanting to deal with instant transactions, but, but, you know, now is the time to think outside the box. And it's a good time for the entrepreneur developed to step forward and take advantage of if you know this, this situation.
18:53
And to perhaps look at how they want to formulate their strategy in the future and whether or not an optional great human touch to provide them with a really good solution. And I think we'll also be looking at sort of things to process to extend agreements, or extend deadlines in further lockdown scenarios and, and perhaps even clauses looking at viability as well.
19:19
So, that brings us to the end of this webinar, and I hope you found it useful and relevant in the current circumstances. If there's something you'd like further information on, or you've got a specific query on any matter that you don't want to discuss, please do let me know, and I'll be happy to help. In the meantime, we've launched a free helpline, giving you direct access to senior team of experts for free legal advice over a 20 minute telephone, or video calls at the details olive on-screen, if you'd like to book a session, and, finally, please, do visit our Smart on Demand pages, and to access recordings of our webinars benchmark talks, and do join in a conversation on LinkedIn and Twitter. Thank you for joining.
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