Option Agreements -v- Conditional Contracts

Conditional contracts and option agreements concern incredibly similar concepts, with vastly different implications. Having discussed pre-emption agreements in this context earlier in the week, this next segment considers the benefits and drawbacks of conditional contracts in practice and the scenarios to which they are best suited.

Conditional Contracts

In brief, a conditional contract is an agreement for the sale and purchase of property which is conditional upon the occurrence of a specific event - known as the 'condition precedent'.

In practice, the condition precedent incorporated is often the obtaining of satisfactory planning permission - however, it may also include other circumstances such as where searches have not yet been received or tenant's are still in situ at the property. At the point whereby the condition precedent has been satisfied, the sale and purchase provisions of the agreement become operative and the parties are legally bound to sell/purchase the property to which the agreement relates. Should the condition not be met by the long-stop date agreed within the contract, the agreement may be terminated by the parties.

Whilst there are various conditions applicable to this type of agreement, all are required to be uncertain at the date of the agreement (simply due to the fact that if the condition were certain, the conditional element of the agreement is academic and what is left would simply constitute a sale and purchase agreement).

Whilst the above portrays a (perhaps overly) simplified view of what constitutes a conditional contract, such agreements often pertain to high value plots of land and, as such, the conditional element upon which they rely must be sufficiently precise to ensure it is clear at what point it has been satisfied - as this is the point at which the agreement will become unconditional. Furthermore, this format of agreement should also incorporate a dispute resolution procedure in the event that a dispute between the parties arises as to when/whether the condition has been satisfied.

Option Agreements -v- Conditional Contracts

By way of a recap, option agreements grant a prospective buyer the exclusive rights to purchase a specific property within an agreed time-frame or after completion of a certain event - such as the granting of planning permission. The most common type of option agreement encountered in practice is that of a 'call option', which imposes a binding obligation on the proprietor to sell the property to the developer at a given price within the option period.

For more information on option agreements: Option Agreements: Application, Benefits and Alternatives

Whilst both option agreements and conditional contracts contain similar concepts, the legal implications of the two can differ dramatically. Call options allow the prospective buyer the benefit of choice as to whether they would like to purchase the property, whereas the parties to a conditional contract are obliged to engaged in the sale/purchase in the event that the condition is satisfied.

In the event that the transaction incorporates the granting of planning permission, a prospective buyer may want to retain their discretion as to whether or not to purchase the property (thus avoiding the risk of being obligated to purchase a property with unsatisfactory planning conditions). In this event, a call option will be the more appropriate structure for the transaction, rather than a contract conditional on planning permission being obtained. With this said, the same undesirable result could be avoided by a prospective buyer by incorporating a detailed definition as what would constitute satisfactory planning permission within the conditional contract. Ultimately, the choice between the two shall derive from the level of security required by both parties.

If you have any queries as to the application of conditional contracts, or would like to know more, please do not hesitate to be in touch: joshua@aticuslaw.co.uk.