Quite often, a property developer feels that it is a better idea to build a property from the
ground up rather than renovating an existing one. There are advantages to this approach, as
there are definitely economies of scale involved when buying a suitable building plot. It
usually works out far cheaper (per individual unit) to build several properties on a slightly
larger plot, than one on a small plot.
With this in mind, one of the most important (if not THE most important factor at this point)
is the establishment of planning permission for the build you intend to carry out. Once you
have this, the capital value of the site can increase many, many times over.
This causes a problem if you intend to be particularly prudent with your finances. Do you:
1. Buy the land without planning permission and run the risk of not getting consent, and
owning a useless plot that cannot be built upon? Or
2. Purchase a plot that already has planning permission in place at up to 10 times the
price it was prior to the grant of planning consent?
Most novice developers follow option 2 and purchase the plot with either outline or full
planning permission already in place. This offers the least amount of risk but is also the most
expensive choice by quite some margin.
Professional property developers are not in the habit of spending money unnecessarily, they
will seek the establishment of a Purchase Option on the land prior to buying it. This is a
contract between the two parties (Vendor & Purchaser) that is ‘open-ended’. This means that
one party can choose to exercise their right to buy something (at a price agreed prior to
contract finalisation) or they can allow it to expire and take no further action.
The way a Purchase Option works is thus:
1. A property developer believes a particular plot of land is suitable for development, but
presently has no planning permission in place. The plot is not currently for sale, so he traces
the owner of the land through the HM Land Registry.
2. He consults the local Planning Authority as to the viability of obtaining planning consent
on the plot. This is done informally and may only amount to a phone call, although a
planning officer might visit the site to discuss the developer’s plans with him. If the planning
officer believes that there are no obvious problems at this point, the developer is likely to be
invited to submit a planning application.
3. The owner of the land is then approached by the developer and asked if he would sell the
land to the developer subject to the satisfactory grant of appropriate planning consent. If the
landowner agrees to this, a purchase price is agreed to (this is normally considerably below
the full value of the site with consent in place, as the developer is still taking some degree of
risk).
4. The developer usually pays the landowner a fee for the facility of agreeing to this contract,
this is known as the Option Fee. It could be around a thousand pounds or so, depending on
the size and scale of the project. This fee is the landowner’s, regardless of the outcome of
any planning decision.
5. The Purchase Option contract is drawn up by a property Solicitor. It states:
a.
The names of the two parties
b.
An indication of the area of land (maybe accompanied by a plan)
c.
The Option fee
d.
The agreed purchase price of the plot
e.
The term of the contract (this could be for 6 months, for example)
f.
The precise conditions of the planning consent required by the Developer
6. The full version of the option contract is then signed by both parties. Now, at any time for
the remaining term of the option contract, the purchaser (developer) can buy the plot from
the vendor at the agreed price, provided the planning consent is satisfactory and any
associated conditions are acceptable to the purchaser. The developer then has the plot he
wanted, with suitable planning permission in place, at a price that was significantly less than
it could have been.
7. If the planning permission is not granted on the terms the developer hoped for and it is
unlikely that it will be granted, the developer can simply allow the term of the option contract
to expire. This becomes worthless upon expiry and the developer is not financially
committed to the land at all. The prospective vendor however, gets to keep the option fee
regardless.
Option contracts are now fairly common, a lease option and a double lease-option are
available but work in different ways to the purchase option. It is simply a contract that one
party can choose to exercise or not, but the other party is legally bound to adhere to.
Purchase options can be fairly complicated, reflecting the nature of English & Welsh
property law. Because of this, it is not really possible to download a contract template that
will serve all situations. I highly recommend a Property Solicitor is consulted and asked to
draw up the draft and final copies of the contract.