Conditional Contract or Option – which is better?

When you are buying or selling property, you will sometimes need either a conditional contract or an option agreement, but it won’t always be clear which is the more suitable. Abigail Mitchell, Head of Commercial Property, explains the differences, and the similarities.

First, what is a conditional contract, and what is an option – and what’s the difference?

A conditional contract is a contract to buy and sell property that is conditional on one or more things happening. A typical conditional contract would be one that is conditional upon the grant of satisfactory planning permission. Once that condition has been met, then the seller and buyer would be locked into the contract to buy and sell.

An option grants the buyer the right to buy the property – and commits the seller to sell it if the buyer exercises that right. Importantly, it doesn’t commit the buyer to exercise the option. It works one way only therefore.

On the face of it an option is much better for a buyer and much worse for a seller – so the choice is easy, isn’t it?

It’s not always as straightforward as that.

Go back to the example of a conditional contract I gave a moment ago. I said that a typical conditional contract was one that was conditional upon the grant of satisfactory planning permission. Who is to say what a “satisfactory planning permission” is? Quite often, a conditional contract contains a definition of “satisfactory planning permission” that is so loose that it is quite similar in effect to an option – a typical definition might be “a grant of planning permission that is satisfactory to the buyer in the buyer’s absolute discretion”.

It doesn’t have to be like that. There are other ways of defining a “satisfactory planning permission” to make it more objective. That can be quite difficult however. You often either end up with a rather vague reference to the seller and buyer “acting reasonably” or with a long list of conditions that a buyer would have to accept. If you’re not careful, you can spend almost as long arguing about the terms of the contract as it might have taken the buyer to get planning permission anyway.

So, which is better, a conditional contract or an option?

There are other factors to take into account:

First, consider the length of the contract (usually defined as the conditional period in a contract, or the option period in an option agreement). Rather than worry too much about the degree of discretion given to the buyer to decide whether he can walk away if he doesn’t like the planning permission, the seller might do better to focus on how long the buyer can tie up the property whilst he tries to do so. Does the agreement allow the buyer to extend the period to cover a planning appeal or judicial review and, if so, for how long and in what circumstances? Is there a cut-off point?

Secondly, is the buyer paying the seller a non-refundable deposit or option fee? Is the buyer paying the seller’s legal and surveyor’s fees? It can be rather difficult for the seller if the buyer ties up the seller’s property for several years and then walks away, leaving the seller out-of-pocket, with bills to pay.

Thirdly, does the agreement provide clear obligations on the buyer to do what is appropriate to pursue a planning application in a timely fashion? What is appropriate will depend upon the circumstances. It may not be appropriate to submit a planning application immediately, but the agreement should reflect that.

The seller may also wish to consider what the worst case might be. If the buyer gets planning permission and then decides not to buy the property, the seller may be in a stronger position than at the start – still owning a property with the benefit of planning permission obtained at the cost of someone else.

All these points need to be weighed in the balance. Both parties need to be properly advised. There is no single right or wrong approach.

Are there times when an option is clearly more appropriate?

 Yes, there may be times when an option is more appropriate. If a developer is assembling a site in several different ownerships, it’s more normal to take options from each land owner in turn. Similarly, if the developer needs to promote the site through the development plan process to establish the principle of planning permission, a longer term option (say for five or ten years) may be appropriate.

Who can guide me?

A surveyor who is experienced in this area is usually a good starting point, working alongside a lawyer who is also used to dealing with such issues. We would be happy to put you in touch with a suitable surveyor.