What is an Option Agreement and what happens if there is a dispute?

An “Option to Purchase” land for residential development is a legal agreement between two parties that gives one party the exclusive right, but not the obligation, to buy a specific piece of land within a predetermined time frame.
January 30, 2024
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But what are the benefits of an Option Agreement and what happens if each party is unable to agree on the price of the land in question?

Residential property expert and a RICS independent expert dealing with residential development disputes, Gary Jeffries, explores.

An option to purchase land provides a potential buyer (the option holder) with the flexibility to optimise the development potential of the site and secure planning permission before committing to the purchase.

It also gives the landowner a degree of certainty regarding a potential future sale. If the option is not exercised within the agreed time frame, the landowner is then free to sell the land to other parties.

However, more often than not, an Option to Purchase land for the development of housing is not at a fixed price, as the options often last five to 10 years, or even longer. This can be challenging and lead to disputes.

As a member of the RICS panel of Independent Experts dealing with residential development disputes, in my experience, these disputes often tend to be over the price to be paid under an Option. But they can also be for things like overage issues whereby the buyer agrees to pay extra on top of the original purchase price if and when certain events happen.

If the parties to a land disposal can’t reach agreement on the price to be paid, Option Agreements will usually contain a mechanism for the price to be determined – usually based on the market value of the land.

This can be problematic as the assessment of market value is often not straightforward, particularly when there are site-specific factors or constraints to consider.

This can include everything from abnormal development costs caused by site infrastructure, foundation treatment or remediation works, and more.

How do you avoid disputes?

It’s crucial for both parties to clearly define the terms of the Option Agreement to avoid misunderstandings or disputes. Make sure you have clear and comprehensive within it to address potential disputes and ensure a smoother resolution process.

When drafting or entering into such agreements, it important to seek legal advice to ensure they meet the requirements of all parties involved.

Despite this, disputes can still arise.

What if a dispute does arise?

When a dispute happens, it can lead to extensive negotiation / re-negotiation, mediation, termination of the agreement, and in some cases, legal action.

Negotiation Period Extensions

Some Option Agreements can include provisions to extend the negotiation period to allow the parties more time to reach an agreement on the price.

Mediation or Arbitration

Agreements can also have a dispute resolution clause that requires the parties to engage in mediation or arbitration to resolve the disagreement. If required, it involves bringing in a neutral third party to help facilitate discussions or make a binding decision.

In this instance, the parties apply to the RICS Dispute Resolution Service to ask for the RICS President to appoint a dispute resolver.

RICS maintains a panel of Experts, including myself, who are appointed to determine such disputes.

Termination of the Agreement

If the Option Agreement has a specific termination clause triggered by the inability to agree on essential terms (such as the purchase price), then the agreement may be terminated and the option holder may lose the opportunity to purchase the land.

Legal Action

In some cases, one party may choose to take legal action to enforce the terms of the option agreement or seek damages for any losses incurred due to the failure to reach an agreement. However, legal action doesn’t happen often and can prove to be time-consuming and costly.


Finally, if the parties are able to agree, they can decide to renegotiate the agreement, including the payment terms, conditions or other relevant details, in an attempt to find common ground.

Needless to say, before entering any Option Agreement, it is essential to carefully review the terms and consult with property and legal professionals from a due diligence perspective, as well as in the event of a disagreement.

For help and advice on Option Agreements, our residential property team, including RICS independent expert, Gary Jeffries, can help.

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