What is a Lease Option Agreement?

What is a Lease Option Agreement?

Andy Haynes looks at the option agreement used in Lease Option deals. If you would like further information on our Lease Option services or any other property related advice, please contact Andy Haynes on 01905 900919 or email to andy@bradleyhayneslaw.co.uk.

An option agreement is a contract between the owner of a property and a potential buyer, which gives the potential buyer the right to purchase the property during a specified time, called the “option period”, for an agreed price.

There are various reasons a property investor might wish to enter into an option agreement. Some of the most common reasons we see are where buyers require time to investigate the viability of the property for development, to obtain financing, to apply for planning permission or simply to obtain control and management of the property and take benefit from any uplift in value in the meantime.

For owners, it may be a chance to receive a payment up front in anticipation of a future sale or a way to sell a property which requires works they don’t wish to undertake themselves.

An option agreement will give the potential buyer the right to service a written notice upon the seller within the option period. The notice will inform the seller that the buyer intends to purchase the property and will trigger a countdown until the purchase completion date. Completion is generally 21 days following service of notice (although the parties can agree otherwise), so it is important that a potential buyer has conducted the necessary searches on the property and obtained financing prior to serving notice.

If you are considering entering into an option agreement, please contact us and we will be happy to provide you with our template heads of terms document. Once we know the details of your intended agreement, we can draft a document suited to your needs.  Some of the basic terms you will need to agree with the other party when entering into an option agreement are as follows:

Option Fee: This is the sum of money a potential buyer may pay to the seller at the time the agreement is signed. This can be a nominal value or it can be any agreed value which offers the seller incentive to enter into the option agreement.

Deposit: This is the sum of money paid to the seller by the buyer upon service of notice. This may be a nominal sum, a standard 10% deposit, or any sum as agreed by the parties.

Purchase Price: This could be any price agreed between the parties or it could be based on a calculation or a determination of the market value of the property at the time the option is exercised.

Option Period: This can be any length of time. Parties will want to take into consideration their plans for the property during the option period and also the time necessary for the buyer to obtain any necessary financing.

Buyer’s Access: Many of the option agreements we draft include a separate management agreement or lease, which allows the potential buyer to manage and sub-let the property during the option period. You can read more about management agreements here (link). Other agreements may allow the buyer to undertake works to the property or obtain planning permission needed for its intended use of the property.

Lease Options can be effective tools, but they carry risks for an Owner and the Option taker which make it essential to consider independent legal advice for both parties.

Please contact a member of our Commercial Property team if you would like assistance with an option agreement. We will be happy to discuss your plans for your property and assist with drafting bespoke documentation that works for your agreement.

If you have any questions on this note or require advice on any other property matter, please email andy@bradleyhayneslaw.co.uk or call 01905 900 919.