When purchasing or leasing property, you may wish to benefit from the contractual assurance that land or property is yours to buy, but also look for a level of protection if a particular background activity is not completed.

For example, you may need planning permission for construction or change of use, or you may be looking for a loan to help with a purchase, which you have not yet found.  You may wonder how to protect that proposed purchase, whilst also covering a situation where the background task is not achieved or rejected.

Clients are often offered either a conditional contract or an option agreement. There are some notable differences between the two and it is crucial to enter into the right agreement for your circumstances.

What is a Conditional Contract?

A client might wish to legally commit themselves to the assurance of an exchange of contracts, but want the comfort of an exit strategy, if a certain trigger event does not occur before a certain date.

For example, a client may want to secure a legal exchange to purchase a development plot, in order to prevent it from being sold to a third party, but at the time of exchange does not have planning permission to build. Within reason, a trigger event can be drafted on a bespoke basis, to cover any identifiable event.

The conditional contract requires that the trigger event occurs before a particular date and if it does, completion of the transaction will then happen shortly afterwards – normally 20 working days. If the trigger event has not occurred by the relevant date, the contract usually ends, and the parties walk away from the transaction.

What Are the Benefits of a Conditional Contract?

A conditional contract is used in situations where a seller wants to sell and a buyer wants to buy a property or parcel of land and all other commercial terms and conditions are agreed upon – save that because of one particular event not having occurred, the transaction cannot quite proceed to legal completion.

Such a contract will give both parties a level of assurance that the transaction can and will happen once the remaining event is achieved and will deal with the mechanism to achieve that.  Likewise, if the trigger event does not occur before an agreed date, a mechanism will control the method by which the contract comes to an end and how the parties walk away from the transaction.

When Would a Conditional Contract Be Best Suited?

A conditional contract would be best suited to a transaction where both buyer and seller (or a tenant and landlord) have more widely agreed on the commercial terms of a transaction. Still, there is one last item, or “condition”, that must be satisfied.

A seller or landlord will want the assurance that the buyer or tenant is fully and earnestly committed to the transaction. The buyer or tenant will want to ensure that their ability to purchase or lease a property is protected, as is their financial outlay in expenditure on achieving the condition or trigger event.

What is an Option Agreement?

A client may wish to purchase a property or accept a lease but is not quite ready to legally commit to the transaction. There might be background work needed, such as sourcing a facility or loan agreement to fund the transaction or seeking planning permission for construction or change of use.

The purchaser or tenant will want to secure a legally-binding option, which acts as a period of exclusivity in exchange for a payment of money – known as an option fee.  The option will allow the purchaser or tenant to complete the transaction within a certain window, known as the option period.  During the option period, the seller or landlord is not permitted to deal with anyone else in respect of the land.

What Are the Benefits of an Option Agreement?

The advantage for a purchaser or tenant is exclusivity. Money can be spent on items such as arrangement or survey fees with a lender, or with a local authority in respect of planning applications and supporting documents. This gives a party an element of assurance that they have a legal right to purchase or lease the land and can therefore spend money on background matters with comfort, knowing it is not wasted.

The advantage for a seller or landlord is that usually, any option fee paid will be non-refundable.  Whilst an option fee will usually be deductible from the final sale price or rent, it is an early payment towards to objective of the transaction, which the seller or landlord gets to keep if the transaction does not proceed within the option period.

When Would an Option Agreement Be Best Suited?

An option agreement is likely to be more appropriate where a buyer and a seller (or a landlord and tenant) are perhaps a little more relaxed towards the final completion. Unlike a conditional contract, where the trigger for completion is the occurrence of a particular event (the satisfaction of a condition), the option agreement relies on a buyer or tenant actually serving notice to tell the seller or land that they want to buy or lease the property.

The choice of whether the buyer, or tenant proceeds to completion, is linked to choice alone, rather than the occurrence of an event. The option grants a period of exclusivity whilst the buyer or tenant considers their option, and the seller or landlord is usually entitled to the payment of a non-refundable option fee as consideration for agreeing to that exclusivity for the agreed period of time.

To Round Up & How We Can Help

Our commercial property specialists across Sheffield and Barnsley have wide and established experience in acting for both buyers and sellers in respect of conditional contracts and option agreements affecting properties of all types.

Our lawyers are able to quickly identify the legal requirements for the relevant process and will offer you concise but detailed legal advice tailored to your particular situation, based on a key understanding of you, as a client, and the business that you operate.

Please contact us today to provide your initial details and one of our commercial property specialists will be able to respond, take further information and provide a bespoke quote.