Options and Pre-emption Rights

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Prospective purchasers and vendors of land frequently wish to ‘lock in’ the other party to the deal and the means by which this is done will normally involve the prospective vendor either giving the prospective purchaser an option to purchase the land or granting the right of pre-emption over its acquisition.

The two sorts of arrangement might seem at first glance to be the same, but there are significant differences between them.

Under an option to purchase agreement, the prospective purchaser is given the right to buy the land, possibly subject to the occurrence of a certain event or events, for a limited period of time. If the specified event occurs, the right to purchase is absolute.

A pre-emption agreement, however, gives the prospective purchaser the right to be ‘first in the queue’ should the landowner decide to sell the land within the pre-emption period.

Accordingly, an immediate right over the land is created under an option. An option will also bind a future owner of the land in question. A pre-emption agreement, however, does not create an immediate interest in the land. If the owner of the land decides not to fulfil the conditions which ‘trigger’ the pre-emption agreement, the holder of the pre-emption rights will never see them come into effect. However, pre-emption rights in regard to registered land take effect at the time of their creation and can therefore be binding on subsequent owners.

There are two other important differences between options and pre-emption agreements. To be binding, an option must be made in writing. This is because an option is a conditional contract for the sale of land and, under English law, contracts for the sale of land must be in writing. A pre-emption agreement need not be made in writing, although it is sensible to do so. In the case of a pre-emption agreement, the contract for land only comes into effect when the trigger event occurs and the holder of the pre-emption right then makes the offer for purchase, which the landowner is bound to accept. At that stage the contract must be put in writing.

The use of options and pre-emption agreements also create somewhat different tax positions and any negotiation of an option or pre-emption agreement should be carried out with the benefit of professional advice.

Source: Commercial Client library Content