Law guide: Property

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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 and 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 contracts to choose from, e.g. private treaty, auction, tender, conditional agreement, option agreement, etc. We will look at conditional and option agreements. People tend to mix up these 2 types of contracts though they have different legal implications.

Conditional agreements

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 by tender and contracts which are privately negotiated from the beginning may or may not be conditional.

It is normally the buyer who suggests a conditional exchange of 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 rarely serves 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;
  • Where the results of the buyer's local search and enquiries of the local authority have not been yet been received;
  • Where vacant possession of the site is not yet available [i.e. the site is still occupied);
  • When the site is leasehold property and the consent of the landlord is required in respect of the proposed assignment 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 because the buyer's local search and enquiries of the local authority have not been received yet, the contract can be made conditional upon the buyer receiving what they consider to be satisfactory results and replies by a set date. The contract should also contain an obligation upon the buyer to submit the correct forms to the local authority and to pay the fees;
  • 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. Further, the seller may 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 if they want.

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.