Claire Murphy, Head of Commercial Property, outlines the key differences and similarities between a conditional contract or an option agreement.

Conditional contracts vs. option agreements: which is more suitable?

When buying or selling property, a conditional contract or an option agreement may be required, but determining which is more appropriate can sometimes be challenging. Claire Murphy, Head of Commercial Property, outlines the key differences and similarities between the two.

Understanding conditional contracts and option agreements

A conditional contract is an agreement to buy and sell property that depends on specific conditions being met. A common example is a contract subject to the granting of satisfactory planning permission. Once the specified condition is fulfilled, both buyer and seller are legally bound to proceed with the transaction.

An option agreement, in contrast, grants the buyer the right—but not the obligation—to purchase the property. The seller, however, is committed to selling should the buyer choose to exercise this right. Unlike a conditional contract, an option agreement operates unilaterally in favour of the buyer.

Is an option agreement always more advantageous for buyers?

While an option agreement may appear more beneficial to a buyer and less favourable to a seller, the reality is more nuanced.

Consider a conditional contract that is contingent on securing "satisfactory planning permission." The definition of "satisfactory" can sometimes be vague, leaving room for the buyer to determine whether the condition has been met at their absolute discretion. In such cases, a conditional contract may function similarly to an option agreement.

However, the definition of "satisfactory planning permission" can be made more objective through precise language. Striking the right balance can be difficult, as parties may spend significant time negotiating contractual terms instead of progressing with the planning process itself.

Key factors to consider when choosing between a conditional contract and an option agreement

Several factors should be evaluated when determining the most appropriate agreement:

• Duration of the agreement: The contract period (referred to as the conditional period in a contract or the option period in an option agreement) should be carefully considered. The seller should assess how long the buyer can secure the property while fulfilling conditions or deciding whether to proceed. If extensions are permitted for appeals or judicial reviews, their duration and circumstances should be clearly outlined.
• Financial considerations: Sellers should determine whether the buyer is paying a non-refundable deposit or option fee, as well as covering legal and surveyor fees. Without such safeguards, sellers may risk lengthy property tie-ups without compensation should the buyer walk away.
• Buyer’s obligations: The agreement should impose clear obligations on the buyer to actively pursue planning permission within a reasonable timeframe. While immediate application submission may not always be feasible, a structured timeline should be included.
• Potential benefits for the seller: If planning permission is granted but the buyer chooses not to proceed, the seller may benefit from an enhanced property value, having obtained planning consent at the buyer’s expense.

When is an option agreement the preferred choice?

There are instances where an option agreement is more suitable. For example, when a developer is assembling a site comprising multiple landowners, securing individual option agreements may be more practical. Similarly, when promoting land through a development plan process to establish planning viability, a longer-term option (e.g., five to ten years) may be the best approach.

Seeking professional guidance

A surveyor with expertise in this area, working alongside an experienced property lawyer, can provide invaluable guidance. Switalskis Solicitors can assist in connecting clients with appropriate professionals to ensure informed decision-making and a smooth transaction process.