Conditional Contracts and Option Agreements - What's the difference?

Conditional Contracts

A conditional property sale contract is one that provides for completion of the sale of a property to take place following satisfaction of a specific condition or multiple conditions.

Some typical examples of such conditions are as follows:

• Planning permission – the sale may be conditional on the buyer obtaining planning permission
• Vacant possession – the sale may be conditional on the seller securing vacant possession
• Consent from a third party – the sale may be conditional on consent from a third party being obtained, such as landlord’s consent to assign a lease
• Funding – the sale may be conditional on the buyer obtaining funding for the purchase

The sale contract should clearly detail the terms of the condition, any obligations on the parties to satisfy the condition, the terms for sale once the condition has been met and also a long stop date for the contract to terminate if the condition has not been satisfied by that date.

Option Agreements

An option agreement is a form of contract whereby one party is granted the option to purchase property within a specified timeframe.

Option agreements are frequently used in the context of property development and such option agreements usually provide that the option to purchase may only be exercised by the developer once planning permission has been obtained. If planning permission is obtained, the developer may then at its discretion choose to exercise the option to buy the property and, subject to the terms of the option agreement, the landowner will be required to sell the property.

The option agreement should specify whether the developer is required to pay an option sum in consideration for being granted the option, what sort of planning permission the developer may apply for, how the developer can exercise the option, the option period during which the developer may exercise the option and also the mechanism for determining the purchase price if the option is exercised.

What’s the difference?

The crucial distinction therefore between a conditional contract and an option agreement is that under an option agreement the buyer/developer retains absolute discretion as to whether to buy the property. The buyer/developer is only contractually obliged to buy the property if they choose to exercise the option and if they do so, the landowner is obliged to sell.

Option agreements may be advantageous to developers as the property is secured from competitors for the duration of the option, whilst the developer tries to obtain planning permission. If planning permission then isn’t obtained or is obtained but isn’t on acceptable terms, the developer isn’t obliged to purchase the property.

This blog is intended to provide general information only. If you are looking for advice on plans or commercial property advice generally, please call 01926 954694 and speak to a member of our team.