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Property contracts

Property contracts

Contents

When property is bought specifically for development, the purchaser needs to look out for a number of things. They need to be satisfied that the land itself is suitable for development. There a number of different types of purchase agreements available in these situations. The construction project itself also needs to be considered.

Types of contract

There is no standard rule as to what kind of contract is to be entered into between the seller and buyer of a site. There are 3 basic types of contract to choose from: public auction, a privately negotiated bargain and open competition. The contracts that are entered into are usually either conditional contracts or option agreements. We will look at conditional contracts and option agreements. People tend to mix up these 2 types of contracts though they have different legal implications.

Conditional contracts

These are contracts where the buyer agrees to purchase the property subject to certain conditions being fulfilled. Once these conditions are fulfilled, the buyer is obliged to buy. Public auctions are almost always unconditional – once the hammer falls, the buyer is obliged to buy. Offers made in open competition are usually conditional, at least on matters such as the extent of the property and searches, and local authority certificates. Very often the preferred bidder (usually the highest offer) will be selected and the parties will then privately negotiate a bargain. Such contracts and those which are privately negotiated from the beginning may or may not be conditional.

With the exception of public auction, almost all contracts for the purchase of property in Scotland are conditional on 3 matters – the public record of ownership showing the owner does own the property and is not prohibited from selling it; the public record of the owner also showing the owner is not prohibited from selling; and the seller's solicitor issuing an undertaking to clear these public records of any prohibitions which appear between the date of the search and the date of the sale. These are important conditions, but when we speak of conditional contracts, we mean conditions other than these.

It is normally the buyer who suggests a conditional contract in a situation where they are anxious not to lose the site to another buyer, but are not yet themselves in a position to commit. A conditional agreement can serve a useful purpose for the seller. Conditional agreements may be suitable in the following circumstances:

  • Where planning permission for the development of the site has not yet been obtained (the price for land with planning permission is usually higher than that without, so such a condition can be an advantage for a seller);
  • Where vacant possession of the site is not yet available (i.e. the site is still occupied);
  • When the site is a long-leasehold property (a maximum of 175 years) and the consent of the landlord is required in respect of the proposed assignation to the buyer.

In drafting a conditional clause, one should clearly set out what is required to be done, by whom, and by when, in order for the condition to be fulfilled. Once any conditions have been fulfilled the contract will become unconditional, meaning that it will be capable of being enforced if a party breaches its terms. These are a few examples:

  • If a contract has to be conditional on site surveys and environmental reports, because this information will affect the cost of building on the land and, thus, its value, the contract can be made conditional upon the buyer carrying out such surveys and obtaining such reports and receiving what they consider to be satisfactory results and replies by a set date.
  • If a buyer is not prepared to commit because planning permission for the development of the site has not been finalised, the contract may be made conditional upon the receipt of an acceptable planning permission by a set date.

Again, the buyer should be obliged to submit a valid planning application without delay, to serve the correct statutory notices and to pay the fees for the application. The seller may also wish to include a clause imposing on the buyer an obligation to appeal an unfavourable planning decision.

Option agreements

The usual form of an option agreement entered into by a buyer with a seller, gives the buyer the right to serve notice upon the seller within a specified time, requiring the seller to sell the site to the buyer at an agreed price or at market value.

Compared to a conditional contract, an option agreement is more flexible as the buyer can exercise their option if they want to, or pass up the opportunity.

Option agreements may be suitable in the following circumstances:

  • If planning permission for the development of the site has yet to be applied for, the buyer may wish to secure an option before investing resources into making an application for permission;
  • If the site to be developed is sub-divided amongst owners and there is no guarantee that all of them will sell, the buyer can assemble the development site gradually by acquiring options over each parcel of land;
  • If a buyer feels that its development may extend to adjacent land in the future, they may acquire an option which can be exercised when the prospect becomes a reality.

In terms of drafting, the option agreement should set out the correct method of serving the option notice. The option will usually be granted subject to payment of an option fee, which may be a considerable sum, depending on the development potential of the site.

When the option is exercised, the agreement will require the land to be conveyed to the potential buyer for a further consideration which may be fixed by the agreement at the outset, or may be determined at the time of the exercise of the option either by reference to the market value or the development value of the site.