Option Agreements: A Quick Guide for Landowners and Tenants

May 14, 2024

By Oliver Morris

Our property experts have summarised the key information you need to be aware of, in order to help prepare you for a situation in which an option agreement arises.

What is an Option Agreement?

An option agreement is an agreement in which the landowner grants another party the right, or the ‘option’, to buy the land within a specific period of time. It will bind the landowner so that they cannot sell the land to anyone else, but gives the other party the freedom and time to assess the viability of the land and whether or not they want to proceed with the purchase.

Option agreements can be standalone agreements but they can also be part of a lease that is granted to a tenant, meaning that the tenant has the option to purchase the property from the landlord.

When can an option be exercised?  

Options generally apply for set periods of time, which need to be strictly adhered to. In addition, conditions on the option may have their own strict time specific requirements.

The recent case of IAA Vehicle Services Ltd v HBC Ltd, looked at whether time was of the essence for the condition of the payment of a deposit when the option was exercised by the tenant.

In this case, the lease granted to the tenant included an option to purchase the Landlord’s interest in the property. The tenant was required under the Standard Conditions of Sale to pay a deposit amounting to 10% of the purchase price “no later than the date of Contract”, however the tenant failed to do so.

The landlord then argued that they were entitled to treat the sale and purchase contract created by the exercise of the option as terminated on the grounds that the deposit had not been received by midnight on the date the option was exercised by the tenant.

The usual position

It is usual for time to be of the essence in sale and purchase contracts. In the case of Samarenko v Dawn Hill House Ltd, the Court of Appeal commented that the requirement to pay a deposit is a fundamental term in a sale and purchase contract and held that a buyer’s failure to pay a deposit in a timely manner is likely to amount to a repudiatory breach, meaning a contract can be terminated if there is a delay in the deposit being paid.

The Decision in IAA Vehicle Services Ltd v HBC Ltd

The High Court held that the tenant’s failure to pay the deposit by midnight on the date the option was exercised in this case did not amount to a breach of contract. The High Court distinguished the option to purchase the landlord’s interest from a standard sale and purchase agreement, noting that the tenant had demonstrated their commitment to the purchase by exercising the option. The High Court also noted that, due to the ongoing lease, the tenant’s delay in making a payment for the deposit did not have an adverse impact on the landlords’ dealings with the property.

What can we learn from this?

The decision highlights the need to take legal advice both when negotiating documents, but also when you are looking to exercise an option/right in any document to ensure that you understand and comply with all the obligations on you. It is easy to miss a condition that needs to be complied with for an option to be exercised correctly.

How can we help?

If you would like to speak to one of our commercial property solicitors, please contact Oliver Morris on 02920 829 123 or omorris@darwingray.com for a free initial chat.

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