Option Agreements Explained: What Landowners Sign and Why

Most land with development potential is worth little more than farmland until it has planning permission, and getting planning permission is expensive and uncertain. An option agreement splits that risk between two parties. The option holder funds and manages the planning work. The landowner agrees to sell if that work succeeds.

Legally, an option is a contract under which you grant someone the right to buy your land on agreed terms during an agreed period. They do not have to buy. You, on the other hand, must sell if they choose to exercise the option within the period and the conditions are met. That one-sided nature is why the terms matter so much: once signed, you are committed, while the buyer has a choice.

Options have been used for strategic land in England for decades, by housebuilders, land promoters and specialist land companies. They are also used in other situations, such as a farmer granting a neighbour an option over a field, but this guide is about options for land with development potential.

An option usually moves through four stages.

1. Heads of terms. A short, non-binding summary of the deal: the price or price formula, the option period, any option fee, who pays which costs, and any special conditions. Both sides take advice at this point.
2. The option agreement. A legal contract, usually protected by a notice on your title at HM Land Registry so the land cannot be sold to someone else during the option period.
3. The planning period. The option holder commissions surveys, puts the site forward through the local plan or submits a planning application, and pays for all of it. You keep owning and using the land.
4. Exercise and completion. If planning is granted on acceptable terms, the option holder serves notice to exercise the option. Contracts become binding and the sale completes, usually within a set number of weeks or months. If planning is not achieved before the option ends, the agreement simply expires.

Between signing and exercise there can be several years. That is normal for land that needs to go through a local plan. For smaller sites where a planning application can be made straight away, the period can be much shorter.

This is the biggest single choice in an option. There are two common approaches.

A Fixed Price

The price is written into the agreement as a figure, sometimes with an increase over time or for more homes than expected. You know exactly what you will receive if the option is exercised, nothing is deducted from it, and if land values fall during the planning period your price is protected.

A Percentage of Market Value

The price is a percentage of the market value of the land once it has planning permission, commonly somewhere between 75% and 90%, after deducting agreed costs. Market value is usually agreed between surveyors at the time, with a mechanism for an independent expert if they cannot agree. The figure is not known until the very end: it moves with the market, down as well as up, and depends heavily on what is deducted.

The example shows why deductions matter so much. A promise of 85% sounds generous, but the number that matters is 85% of what. With a fixed price there are no deductions to argue about. With a percentage, your solicitor should make sure every deduction is listed, capped where possible, and backed by evidence.

The option period needs to be long enough for the planning route the site requires. For a small site where an application can be made quickly, a few years may be enough. For a site that must wait for a local plan allocation, it can be much longer, sometimes a decade or more.

Many options include ways to extend the period, for example if a planning application or appeal is still being decided when the period ends. That is reasonable, because it would be unfair for an option to expire the week before a decision. What matters is that extensions are tied to specific events, are limited in number, and cannot run on indefinitely.

A long-stop date, after which the option ends whatever is happening, gives you certainty. Ask for one.

An option gives the buyer the right to buy, not an obligation. That makes it important to write down what they must do in the meantime, so that your land is not tied up without any real effort being made.

• Submit representations to the local plan at each stage, or a planning application within a set time.
• Use reasonable endeavours, or a stronger obligation, to obtain a satisfactory planning permission.
• Keep you informed, with regular written updates and copies of key documents.
• Consult you before submitting applications, so you can comment on the scheme.
• Pay for all planning work, including appeals, and never pass those costs to you.

"Satisfactory planning permission" is usually defined, for example as outline permission for at least a certain number of homes without unreasonable conditions. That definition decides when the option can be exercised, so it deserves a careful read.

You keep owning and using your land, but an option does place some limits on you, because the buyer needs the land to be available and unencumbered if planning succeeds.

You will also be asked to cooperate with the planning process, for example by signing the ownership certificate on a planning application and allowing surveyors reasonable access. These obligations are normal, but it is worth making sure access visits are arranged in advance and any damage is put right.

Once signed, the option is registered at HM Land Registry, usually by a notice on your title. This tells anyone who searches the register that the option exists, and in practice stops the land being sold free of it.

If the option ends without being exercised, the notice should be removed. Your solicitor should make sure the agreement obliges the option holder to cancel it promptly, at their cost.

When planning is granted and the option holder decides to buy, they serve a notice to exercise the option. That turns the option into a binding contract for sale. Completion follows after the period set out in the agreement, when the purchase price is paid and you give vacant possession.

For tax purposes, the date the option is exercised usually matters more than the date you are paid, because that is when the disposal takes place for Capital Gains Tax. Our guide to tax when selling land for development explains this in more detail.

If the option period ends without exercise, the agreement lapses. You keep your land and any option fee you were paid. Ask what happens to the surveys and reports prepared during the option. Some agreements give the landowner a copy, which can be useful if you try again later.

We agree the purchase price with you at the start, set above what your land is worth today in its current use. We then fund and manage all of the planning work, at our own cost and risk. If planning permission is granted, we complete the purchase and you receive the agreed price. If planning is refused or not achieved within the option period, you keep your land and owe us nothing.

You carry on farming, letting or using the land as normal until completion. We contribute to the cost of your own independent solicitor and land agent so that someone acting only for you reviews every term before you sign.

A promotion agreement is the other common route. Under a promotion agreement, the promoter also pays for planning, but instead of buying the land it sells it on the open market once planning is granted, then takes a fee, commonly a percentage of the net sale price, and recovers its costs. You receive the rest.

An option with a fixed price gives you certainty: the figure is agreed before any work starts and nothing is deducted from it. Under a promotion agreement, your money is a share of whatever the land eventually sells for, after the promoter's costs and fee, and it is not known until the end. We explain the differences side by side in our comparison of option, promotion and outright sale, and the typical fees in our guide to promotion agreement fees and deductions.

• Is the price fixed, or a formula? If a formula, show me a worked example with realistic figures.
• What exactly can be deducted, and is there a cap?
• How long is the option period, what can extend it, and is there a long-stop date?
• What must you do to pursue planning, and how will you keep me informed?
• What happens to the surveys and reports if the option expires?
• Can I keep farming, grazing or letting the land until completion?
• Who pays my legal and agent fees, and up to what amount?
• Is there overage if a better permission is obtained later?
• Can you assign the agreement to someone else, and on what terms?
• What happens if you, or I, die or the company changes hands during the option?

If you think your land might have potential, the first step is a free desktop review. Request a review or call us on the number at the top of this page.