Option Agreements: A Quick Guide for Landowners and Tenants

May 14, 2024

By Oliver Morris

Our property experts have summarised the key information you need to be aware of, in order to help prepare you for a situation in which an option agreement arises.

What is an Option Agreement?

An option agreement is an agreement in which the landowner grants another party the right, or the ‘option’, to buy the land within a specific period of time. It will bind the landowner so that they cannot sell the land to anyone else, but gives the other party the freedom and time to assess the viability of the land and whether or not they want to proceed with the purchase.

Option agreements can be standalone agreements but they can also be part of a lease that is granted to a tenant, meaning that the tenant has the option to purchase the property from the landlord.

When can an option be exercised?  

Options generally apply for set periods of time, which need to be strictly adhered to. In addition, conditions on the option may have their own strict time specific requirements.

The recent case of IAA Vehicle Services Ltd v HBC Ltd, looked at whether time was of the essence for the condition of the payment of a deposit when the option was exercised by the tenant.

In this case, the lease granted to the tenant included an option to purchase the Landlord’s interest in the property. The tenant was required under the Standard Conditions of Sale to pay a deposit amounting to 10% of the purchase price “no later than the date of Contract”, however the tenant failed to do so.

The landlord then argued that they were entitled to treat the sale and purchase contract created by the exercise of the option as terminated on the grounds that the deposit had not been received by midnight on the date the option was exercised by the tenant.

The usual position

It is usual for time to be of the essence in sale and purchase contracts. In the case of Samarenko v Dawn Hill House Ltd, the Court of Appeal commented that the requirement to pay a deposit is a fundamental term in a sale and purchase contract and held that a buyer’s failure to pay a deposit in a timely manner is likely to amount to a repudiatory breach, meaning a contract can be terminated if there is a delay in the deposit being paid.

The Decision in IAA Vehicle Services Ltd v HBC Ltd

The High Court held that the tenant’s failure to pay the deposit by midnight on the date the option was exercised in this case did not amount to a breach of contract. The High Court distinguished the option to purchase the landlord’s interest from a standard sale and purchase agreement, noting that the tenant had demonstrated their commitment to the purchase by exercising the option. The High Court also noted that, due to the ongoing lease, the tenant’s delay in making a payment for the deposit did not have an adverse impact on the landlords’ dealings with the property.

What can we learn from this?

The decision highlights the need to take legal advice both when negotiating documents, but also when you are looking to exercise an option/right in any document to ensure that you understand and comply with all the obligations on you. It is easy to miss a condition that needs to be complied with for an option to be exercised correctly.

How can we help?

If you would like to speak to one of our commercial property solicitors, please contact Oliver Morris on 02920 829 123 or omorris@darwingray.com for a free initial chat.

Contact Our Team
Catherine Burke
Partner
View Profile
Donald Gray
Consultant
View Profile
Elin Davies
Associate
View Profile
Elliw Jones
Associate
View Profile
Gareth Wedge
Partner
View Profile
Geraint Manley
Trainee Solicitor
View Profile
Lisa Evans
Paralegal
View Profile
Lorna Fraser
Associate
View Profile
Mike Raymond
Trainee Solicitor
View Profile
Non Kinsey
Associate
View Profile

I have worked with Darwin Gray for a number of years and the level of service, professionalism and timely response is second to none. I would highly recommend Darwin Gray to any business.”

Becs Beslee
Dice FM Ltd

Darwin Gray have provided us with a first-class service for many years now. They really take the time to understand our business and develop relationships which results in advice and support that is contextualised and effective.”

Rebecca Cooper
ACT Training

We have worked with Darwin Gray for several years and have always found their services and advice to be first class.”

Karen Gale
Stepping Stones Group

An extremely professional and sincere firm who make time for your queries and understand the need to break down certain facts and information to ensure everything is understood perfectly. I would highly recommend the firm to anyone looking for any type of legal advice”

Gwawr Booth
Portal Training Ltd

PSS has worked with Darwin Gray for many years. We have always received an excellent service. Prompt and professional advice and support.”

Ledia Shabani
Property Support Services UK Ltd

Darwin Gray have acted for myself and my company over a number of years and at all times we have been treated with a professional manner yet maintain a common-sense approach at all levels. We couldn’t recommend them more highly.”

Simon Baston
Loft Co

We have been clients of Darwin Gray for many years; they’ve always dealt with all of our legal matters with such professionalism. They work around us, even during awkward hours, and we feel confident we can always rely on them.”

Louise Williams
ACT Training

Darwin Gray has been acting for Siltbuster for more than ten years. We would have no hesitation in recommending Darwin Gray to other organisations small or large.”

Richard D Coulton
Siltbuster Ltd