In brief – Make sure your position is fully protected
When negotiating options, vendors need to protect their position by reaching agreement, in advance of the documentation phase, on a range of important financial, legal and practical considerations.
Discussing the commercial parameters with the agent who approaches you
This article continues the discussion in our earlier articles, Option agreements from a property developer's perspective
and Option agreements from a real estate agent's perspective
You as vendor of a property are approached by an agent who says that he/she has a developer or developers who are interested in your property (either alone or in conjunction with neighbouring properties). Set out below are some things you need to discuss with the agent to make sure that your position is fully protected and that the parties are in agreement on the fundamental commercial parameters before progressing to documentation.
Checklist for vendors negotiating options
The following issues need to be considered to protect your interests as an owner:
- What is the option fee? Does this form part of the price or not?
- Will you give an extension to the option period? If so, in what circumstances and what conditions have to be met? (For example, certain milestones regarding the developer seeking finance, development consent or similar issues). Further, should you be paid a fee for these extensions? Normally these fees would not form part of the price.
- What is the price and how should it be calculated? Often, the price may be calculated depending upon the ultimate terms of the development consent obtained by the purchaser (i.e. there may be some uplift above a base figure if a certain yield is obtained by the developer).
- Consider a provision that if the option is not exercised, you obtain the benefit of any applications made, or any consents obtained by the developer and all reports done by the developer.
- What is the nature of the option? Is it a straight call option (where it is entirely in the hands of the developer as to whether it proceeds or not)? Or is it a put and call option, which means that if the developer does not exercise its option, you can force the developer to buy by giving notice?
- How relevant is the identity of the developer to your level of comfort? Is it the case that you only wish to deal with the person who originally approaches you and do not wish the developer to have the right to assign the option or nominate some third party whom you may never have met and who may be not connected with the developer?
- Do you ask for guarantees under the contract if the purchaser is a corporation (especially if there is an assignment or nomination)?
- What is the GST position, particularly with respect to option fees and generally under the contract?
- Should the developer, by virtue of the rights that it wants during the option period, pay or contribute something towards outgoings (council rates, water rates, land tax and the like)?
- If the developer wants to exercise rights of access during the option period, what limitations are to be imposed (particularly having regard to the nature of activities that will continue to be conducted on and from the property during the option period)?
- If a development consent is being sought, do you wish to view it, to ensure that what was represented to you complies with what is being lodged? Do you require periodic progress reports from the developer?
- Do you agree to a caveat being lodged under the option, with you being given the right under an irrevocable power of attorney to withdraw the caveat if the option is not exercised?
- If any preliminary works such as site clearing are required to be undertaken, what conditions do you wish to impose? (e.g. notice before works are done, restrictions on access and when works can be done; need for insurances)
- Do you want the right to remove items from the property when you elect to do so, once the option is exercised?
Reaching agreement on commercial details will make the deal go smoothly
Considering these matters will make sure that the option negotiations fully address the issues and concerns of all parties and will allow the documentation to proceed promptly.
This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal or financial advice. Please seek your own legal or financial advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.