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Issues can arise if the terms of the sale contract are not sufficiently clear or have been drafted too narrowly/widely.
Development Land is quite often sold and purchased using one of 3 contract structures:
1 – Unconditional Sale/Purchase
2 – Option
3 – Conditional Contract
With this structure, the parties agree for the sale/purchase to complete at a predetermined price on a fixed date. There is no conditionality attached to the sale/purchase.
An Option is a type of contract between a seller and a potential buyer.
The Option gives the potential buyer the right to call for the land to be sold to them at a future date. The price may be agreed at the outset or be determined by the terms of Option. Quite often, but not always, the potential buyer will have various obligations and conditions that they must satisfy prior to being entitled to exercise their rights under the Option.
An example of where an Option might be used is as follows:
A buyer (B) wishes to purchase land from a seller (S). B intends to build and sell 20 houses on the land. The land does not currently have the benefit of planning permission and neither S nor B knows whether planning permission will be granted.
S does not wish to fund a planning application.
S does not wish to accept a price which is reflective of bare land as he believes that the land has development potential.
B does not wish to buy the land if he cannot develop it.
In the above scenario the parties may agree that B is entitled to exercise his right to buy the land once planning permission has been obtained. At that point the price will be determined using a calculation agreed in the Option (e.g. a percentage of the market value of the land with planning permission).
Depending on the bargaining strength of the parties, the seller may demand an initial fee to enter into the Option.
A potential buyer may prefer to enter into an Option (as opposed to an Unconditional Sale or Conditional Contract) because it allows them to have the security of knowing that they can call for the land to be sold to them but that there is no compulsion on them to do so.
A Conditional Contract is similar to an Option in many ways. The fundamental difference is that, unlike an Option, if the relevant conditions of the contract are satisfied there is an obligation on the buyer to buy. A seller may prefer to enter into a Conditional Contract (as opposed to an Option) because it provides more comfort due to the obligation on the buyer to purchase.
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