Option Agreements – Purchasing Land
Imagine a developer identifies a plot of land he or she believes has significant future development potential but obtaining planning may not be guaranteed. The developer may be apprehensive about buying the land, but they would still want an interest in the land to give sufficient security in order to outlay planning costs. Similarly, landowners with a parcel of land suitable for development may wish to obtain planning on their land to realise planning potential, but they would not want to pay the planning costs themselves. What are the strategies that can be employed by both landowners and developers to assist in such land deals?
Option Agreements
A developer and a landowner can enter into an Option Agreement, which gives the developer the option to purchase the land (usually at an agreed sum, or at market price less pre-agreed deductions) and the ability to obtain planning, without the risk that they will be compelled to acquire a parcel of land without the benefit of planning. Entering into an Option Agreement can also benefit landowners as they can realise a higher price of their land without having to put forward their own funds in obtaining planning.
How are Option Agreements useful to developers?
The most common form of Option Agreement (known as a “call option”) is useful for a developer in exploring the viability of the potential development.
A different form of Option Agreement (known as a “put option”), can also be used which gives the landowner the ability to compel a developer to buy the land.
Is it possible to combine a put option and a call option?
Cross options, or put and call options, arise when a developer is given a call option in return for which the developer grants the landowner a put option. This form of Option Agreement may be useful when a developer identifies a specific plot of land it may wish to purchase in the future, but the landowner wishes to compel the developer to purchase the entire plot of land.
What are the tax implications of an Open Agreement?
The law states that the acquisition of an option to purchase land is in itself a land transaction – meaning a developer will be required to adhere to SDLT requirements on both the Option and any subsequent transfer of the land if the consideration paid on each part of the transaction is above the notifiable level (currently £40,000). A developer should also be wary of any VAT implications, by ensuring the option sum is either VAT inclusive, or is exclusive and the VAT treatment of the land is known at the outset and warranties are given that this will not be changed by the landowner during the course of the Option Period.
A landowner may incur a liability to Capital Gains Tax, as an option is treated by the law as an asset which is disposed of in consideration for the option sum.
