Option agreements from a property developer's perspective

In brief – Developers should consider a range of factors when negotiating options to acquire real estate

Access to the property, the right to lodge development applications, the right to market the property and the right to extend the option period are among the aspects of an option agreement that developers should consider.

Need for strict compliance with specifics of option agreement

This article addresses factors that property developers should consider when negotiating options to acquire real estate.

However, developers need to be aware that a long line of decisions of the courts around Australia demonstrates that time is of the essence in most instances where options are concerned, particularly with regard to payments and exercise of rights; and that strict compliance with what is in the option agreement is required to exercise an option validly.

What should property developers consider when negotiating options?

Developers need to turn their mind specifically to the following matters in approaching negotiations.

• The term of the option.
• Any rights to extend the option period, any criteria that have to be met to exercise these rights and any payments to be made for these extensions.
• What access is required to the property during the option period and how this right is exercised or limited.
• The right to lodge applications and amended applications, and appeals with respect to the terms of consents given or any deemed refusals.
• Whether there is to be a right to market the project and effect any off-the-plan sales during the option period and, if so, the rights to mention the property, erect appropriate signs and have access for marketing purposes.
• Whether any preliminary works (such as clearing works) which will enhance the value of the property and give the developer a head start with respect to its development should be undertaken and what conditions are to apply.
• Whether, if there are tenancies, there is to be a right to negotiate with the tenants or to negotiate tenancies for vacant space (these arrangements only to come into effect when the property is owned by the developer).
• Whether the fees (including any extension fees) paid under an option are to form part of the price or are to be in addition to the price.
• The right to put up signs on the property, particularly advertising applications, and perhaps some for marketing purposes.
• The need to have the right to caveat the property to protect the interests under the option.
• If there is more than one property, the need to have the documents in similar terms (particularly from a financier's perspective) and interdependent.

Considering the specifics of the option agreement in advance will help you avoid delays

Considering the above matters and any other issues that are particular to the site you are seeking to acquire will help with negotiating your option. Furthermore and most importantly, it will enable the documents to be concluded quickly once a commercial agreement has been reached.

There is nothing more frustrating than having the documenting of the transaction significantly delayed while the parties thrash out an agreement over questions which they did not discuss during their initial negotiations.