Option Agreements Explained: What Landowners Sign and Why

Most land with development potential is worth little more than farmland until it has planning permission, and getting planning permission is expensive and uncertain. An option agreement puts that cost and uncertainty on the party best placed to carry it. The option holder funds and manages the planning work. The landowner agrees to sell if that work succeeds.

Legally, an option is a contract under which you grant someone the right to buy your land on terms agreed at the start. You agree now that you will sell if the conditions are met, most importantly that planning permission has been secured. With us, those conditions and the price are written down from day one, and once permission is secured we complete the purchase.

Options have been used for strategic land in England for decades, by housebuilders, land promoters and specialist land companies. They are also used in other situations, such as a farmer granting a neighbour an option over a field, but this guide is about options for land with development potential.

An option usually moves through four stages.

1. Heads of terms. A short, non-binding summary of the deal: the price, any option fee, how your legal and agent fees are covered, and any special conditions. It lets everyone in the family see the whole deal on one page before any legal drafting is paid for.
2. The option agreement. A legal contract, protected by an entry on your title at HM Land Registry. Signing it does not transfer the land. You remain the owner.
3. The planning period. The option holder commissions surveys, puts the site forward through the local plan or submits a planning application, and pays for all of it. You keep owning and using the land.
4. Exercise and completion. Once planning permission has been secured, the option holder serves notice to exercise the option. The contract becomes binding and the purchase completes, with the agreed price paid to you on completion. If planning is not achieved, the agreement comes to an end and you keep your land.

How long the planning stage takes depends on the route. A small site where an application can be made straight away can move far more quickly than land that needs to be allocated in a local plan first. Our guide on how long planning takes explains the typical stages.

There are two ways an option price can be set. We use the first.

A Fixed Price

The price is written into the agreement as a figure. You know exactly what you will receive when the purchase completes, nothing is deducted from it, and if land values fall during the planning period your price is protected. There is nothing to value, argue over or check at the end.

A fixed figure also makes decisions at home easier. Brothers and sisters, executors and trustees can all agree to one clear number, and your accountant can plan around it from the start.

A Percentage of Market Value

Some option holders instead set the price as a share of the market value of the land once it has planning permission, after deducting agreed costs. Market value is worked out by surveyors at the time, with an independent expert if they cannot agree. The figure is not known until the very end. It moves with the market, down as well as up, and depends heavily on what is deducted along the way.

Why Land With Planning Is Worth Less Than People Expect

Much of the uncertainty in a percentage deal comes from how land with planning is valued. A housebuilder works out what it can pay by starting with the value of the finished homes and taking off everything it has to spend to deliver them: build costs, roads and drainage, the affordable homes the council requires, Section 106 contributions, the Community Infrastructure Levy, Biodiversity Net Gain and its own profit. What is left is the land value.

Each of those items can change during the planning process, and each one becomes a point for surveyors to debate when a percentage price is worked out. Under a fixed price, none of it is your concern. Our guides to Section 106 and CIL and Biodiversity Net Gain explain how those costs are calculated.

Every visit is arranged with you in advance. Let us know where livestock are, which gates must stay shut, when you are drilling or harvesting and any areas to avoid, and we pass that on to every consultant. Where a survey can be timed around a crop, we arrange it that way, and any damage to crops, fences, gates or drains is put right.

Some ecology surveys can only be done at certain times of year. That shapes the timetable, which is why survey work usually begins soon after the agreement is signed.

For almost every landowner, day-to-day life carries on as before. The agreement simply keeps the land in the same state it was in when the price was agreed, so that the purchase can go ahead smoothly when the time comes.

None of these conversations is a formality to dread. Most requests are straightforward, and a quick call usually settles them.

You will also receive a formal notice when a planning application is made, because the law requires every owner of the land to be told. It is routine, and you will already know it is coming.

Once signed, the option is registered at HM Land Registry, usually by a notice on your title. Anyone who looks at the register can see that the option exists, and it stays in place if the land changes hands, for example to your executors.

Day to day, you will not notice it. It does not change who owns the land or your right to use it. If the land is mortgaged, your lender may need to consent to the option, and your solicitor will contact them, so it helps to find your mortgage paperwork early.

If the agreement ends without a sale, the notice is removed so that your title is clear again.

Documents Worth Finding Early

• Your title number, or the old deeds if the land has never been registered.
• Any tenancy agreements, grazing licences or written arrangements with neighbours.
• Wayleave agreements for electricity poles, pipes or cables crossing the land.
• Details of any environmental or stewardship agreements covering the fields.
• Letters or decisions from any past planning applications on or near the land.

None of these needs to be perfect. Missing paperwork is common, and your solicitor and ours will work through any gaps together. Our guide to tenancies and vacant possession explains why occupation matters.

Once planning permission has been secured, we serve a notice to exercise the option. That turns it into a binding contract for sale. Completion follows as set out in the agreement, when the agreed price is paid to you and you give vacant possession. Your solicitor handles the conveyancing in the normal way.

Vacant possession is given on the completion date, not before. The agreement sets out the gap between exercise and completion, so you can plan a final harvest, move stock or bring a grazing licence to an end at the right time.

If the agreement covers only part of your holding, the new boundary, fencing and access to the land you keep are settled in the agreement, so the rest of the farm keeps working after the sale.

For tax purposes, the date the option is exercised usually matters more than the date you are paid, because that is when the disposal takes place for Capital Gains Tax. Our guide to tax when selling land for development explains this in more detail.

Refusals happen, even on good sites. A planning committee can go against its own officers' recommendation, and some decisions turn on judgement rather than rules. A refusal is not always the end.

Where there is a realistic prospect of success, we may appeal to the Planning Inspectorate or submit a revised scheme that answers the council's reasons. Both are paid for by us, and the agreement continues while an appeal or a new application is being decided.

If planning is not achieved, the agreement ends. You keep your land and any option fee you were paid, and you owe us nothing. The agreement sets out what happens to the surveys and reports prepared along the way.

• Appointing, briefing and paying every consultant the council expects to see.
• Early discussions with the council's planning officers and the highway authority.
• Submitting the land through the council's call for sites and local plan consultations.
• Community consultation, and answering questions from neighbours and the parish council.
• Preparing and submitting the planning application, and responding to consultees.
• Negotiating the Section 106 agreement and planning conditions.
• Presenting the scheme at committee, and running any appeal.

Your part is to tell us about the land, keep us posted on anything that changes on it, and let the surveyors in. We keep you informed at every consultation, committee meeting and decision. Our guide to the call for sites and local plans explains how land is put forward to a council.

A promotion agreement is the other common route. Under a promotion agreement, the promoter also pays for planning, but instead of buying the land it sells it on the open market once planning is granted, then takes a fee, commonly a percentage of the net sale price, and recovers its costs. You receive the rest.

An option with a fixed price gives you certainty: the figure is agreed before any work starts and nothing is deducted from it. Under a promotion agreement, your money is a share of whatever the land eventually sells for, after the promoter's costs and fee, and it is not known until the end. We explain the differences side by side in our comparison of option, promotion and outright sale, and the typical fees in our guide to promotion agreement fees and deductions.

If you think your land might have potential, the first step is a free desktop review. Request a review or get in touch if you would rather talk it through first.