In the scope of property development, landowners and developers often experience scenarios where a sale agreement is desired, however, planning permission is yet to be secured.
In such cases, two common legal instruments are employed:
- Option agreements; and
- Conditional sale contracts.
While both assist in facilitating property transactions, they have distinct characteristics and implications that are essential to understand.
Option agreements – flexibility for buyers
An option agreement gives the potential buyer the right, but not the obligation, to purchase the property at a predetermined price within a specific timeframe. In exchange for this flexibility, the buyer typically pays a non-refundable option fee to the seller. This fee serves two purposes:
- It compensates the seller for the estate being effectively off the market during the option period.
- It reflects the value of the flexibility afforded to the buyer.
In some circumstances, the option fee may be subtracted from the final purchase price if the sale proceeds to completion.
Conditional sale contracts – mutual commitment
A conditional sale contract, on the other hand, creates a joining agreement between both parties to complete the property transaction, subject to specific conditions being met. The main features are:
- The buyer often pays a deposit, often a percentage of the purchase price.
- The deposit is usually refundable if conditions are not met, except if the buyer breaches the agreement.
- If the buyer fails to complete the sale after conditions are satisfied, they forfeit the deposit and may be liable for the seller’s losses.
Option agreements vs conditional sale contracts – the comparative advantages and considerations
Both instruments provide distinct benefits and possible downsides:
- Security: Both secure the estate for the buyer at an agreed price while they pursue planning permission or conduct due diligence.
- Obligation to purchase: The primary difference lies in the buyer’s commitment. An option agreement gives the buyer the option to walk away, compared to a conditional contract which creates a shared obligation to progress if conditions are met.
- Seller’s perspective: Option agreements can be less beneficial for sellers, because they tie up the property without necessarily securing a sale.
- Buyer’s obligations: Both typically require the buyer to use reasonable undertakings to acquire essential consents promptly, balancing progress with their commercial interests.
Risks of proceeding without a formal agreement
Not having either an option agreement or a conditional contract between both parties can lead to significant risks:
- Buyers may participate in obtaining planning permission, only to have the seller revoke or renegotiate terms.
- Purchasing unconditionally without planning permission could leave the buyer with undevelopable land.
Why you should seek legal advice
Due to the complexities and potential difficulties involved in property development transactions, seeking expert legal advice is vital. Our firm specialises in property law and can provide tailored advice on the most suitable agreement for your specific circumstances, ensuring your interests are protected throughout the entire process.
It’s important to understand the distinctions of option agreements and conditional sale contracts as it means property developers and landowners can therefore make informed decisions that align with their objectives and risk tolerance in the fast-paced Auckland property market.
This article is for information only and does not constitute legal/financial advice. Please contact us for advice tailored to your specific position. Some of the content presented on our website has been generated with the assistance of Artificial Intelligence (AI). We ensure that all AI-generated content meets our high standards for accuracy and relevance.
