An option agreement is an agreement made between a landowner and a potential purchaser of their property. When the parties enter into the agreement, often an agreed payment is made to the landowner and in exchange, the purchaser is granted a contractually binding first option to purchase the property.
Included in this section is a template Option Agreement and Legal Charge which could be used by local authorities in certain circumstances for CLH projects.
- When considering an asset transfer it may not always be in the best interest of the council or the CLH organisation to simply grant a lease and hand over the land or buildings to be developed as CLH. Problems with planning permission or funding can see the CLH organisation left with land it cannot develop, with the Council unable to make use of it either
- An Option Agreement allows the CLH organisation the option to call on the council to sell a plot of land to it. The option may be exercisable at any time during the option period or only on the occurrence of certain events such as the obtaining of planning permission or grant of funding
- A decision on whether or not to take up the option rests with the CLH organisation and simply falls away if this doesn’t happen within the option period. If the Option is taken up then either an agreed sum is paid or else the agreement will contain a mechanism to calculate the market value for the land (with the benefit of the planning permission obtained) which will then be payable by the CLH organisation to complete their purchase
This is obviously beneficial to the CLH organisation as it is not committed to purchase the land or buildings if it is not able to move forward with the project for any reason. However, there are also advantages to the council, such as:
- the Council can demand an option sum in return for granting the option and tying up the land for the length of the option period. Sometimes the option sum is a significant amount and this is usually retained whether or not the option is exercised
- the CLH will obtain planning permission at no cost to the Council
- the CLH organisation is more likely to make a success of the project, which is beneficial to the council in respect of the housing it creates, by not being tied in absolutely at an early stage
However, the option agreement will not necessarily include active obligations on the CLH organisation to develop the land, although clearly this is their intention. A development agreement, containing such obligations should also be considered. This can also be conditional on factors such as planning and funding.
A council could also grant the CLH organisation a ‘right of pre-emption’. This is effectively a right of first refusal for a period of time i.e. if the council wanted to sell then they must first offer the land to the CLH organisation. This would provide it with certainty that the land will not be sold without their knowledge whilst they put themselves in a position to be able to proceed with the purchase.
- It is very likely that any CLH organisation undertaking a development project will require funding. It may be that grant funding can be obtained. Otherwise, they may well seek commercial bank funding. In this case, the bank will undoubtedly require security for their loan by way of a Charge over the land being acquired
- A template Legal Charge which sets out the types of clauses typically included can be found below. However in reality, almost all commercial banks will have their own, non-negotiable, form of Charge. In both cases the document will refer to a Loan or Facility Agreement which sets out the terms of the loan itself as opposed to the terms of the security which are set out in the Charge
- It is important for both the CLH organisation and the council to ensure that the requirements of any funder are considered when agreeing a form of lease. Funders are likely to have very strict requirements around forfeiture, use and alienation provisions as they may have to realise their security and dispose of the lease to a third party
- Neither party would want to grant a lease only to find that the CLH organisation cannot proceed with their project due to the funder not being happy to lend on the lease in place. This links back to the potential for an Option Agreement to be put in place to allow time for the CLH organisation to obtain funding and for the council to be aware of and consider the funder’s requirements in the negotiation of the terms of the lease