An option agreement and a conditional contract are both legally binding contracts but are often mixed up as they have similar concepts but completely different legal implications.
Conditional Contract
In a conditional contract the buyer agrees to buy the property subject to certain conditions being fulfilled. Once the conditions have been fulfilled they are obliged to buy that property. Examples of situations in which a conditional contract may be used are:
- Where the searches have not yet been received.
- Where the sellers/tenants of the property have not yet vacated the premises.
- Where planning permission is awaited.
Option Agreement
Whereas with an Option Agreement, the buyer has the ‘option’ to buy the property subject to certain conditions being fulfilled. This is attractive mainly to developers who wish to buy land to build/develop upon. Once the planning permission has been granted or a condition has been fulfilled the buyer then has the right to serve a notice upon the seller requiring the seller to sell the site to the buyer. This would be within a time specified in the option agreement (can be up to 21 years) and at either an agreed price or at market value. Examples of situations in which option agreements may be used are:
- Where developers want to secure an option agreement before paying out for planning permissions.
- Where land is owned by different owners there may be uncertainty as to whether they will all sell. In this situation the developer may want to have option agreements with all of them before buying.
Options are normally registered against the title of the property at the Land Registry as a notice so any other parties can see that the developer/buyer has an interest in the land.
An option agreement is different from a conditional contract as it offers more flexibility as to whether or not the buyer wishes to buy. Both contracts may have deposit monies payable upon exchange.
For further advice on Option Agreements or Conditional Contracts please contact the Commercial Property Department on 0116 266 5394.