A call option allows a developer to call on a landowner to sell its property to the developer during the option period, usually on the occurrence of certain events, such as the obtaining of planning permission. The decision as to whether or not to exercise the option rests with the developer.
The stages for the operation of an option are:
- Agreement – the parties entering into an option agreement for an option period, on the payment of an option sum to the landowner
- Exercise – if the developer decides to exercise the option during the option period, it will serve a notice on the landowner and purchase the land
- Expiry – in the event that the developer does not serve a notice within the option period, it will lapse and the landowner can then dispose of the land free of the option.
Since 6 April 2010, when the Perpetuities and Accumulations Act 2009 came into effect, there is no longer any restriction on the duration of an option. However, the landowner and developer will still need to agree an option period for its exercise as the landowner will understandably be reluctant to tie up its land for an indefinite period.
Option extensions are sometimes drafted in the agreement, where the decision as to whether or not to exercise the option will depend on external factors such as the outcome of a planning application or appeal.
A developer will not want to lose the benefit of the option through the option period expiring at a time when the developer is close to getting its plans for development fully in place. Such an option extension was considered in the case of Denton Homes Limited v Cobb & Cobb, where the developer on the payment of an option fee of £100,000 had an option to purchase land at a fixed price of £1.4m.
The option agreement provided for a fixed option period but with provision for the period to be extended by a further length of time, if there was an outstanding planning application at the time when the fixed option period would otherwise have expired. The option period, as extended by a Deed of Variation, expired on 29 January 2021. An appeal against non-determination was lodged by the developer on 28 January 2021, thereby activating one of the circumstances for an option extension. This had the effect of extending the option period to 14 December 2021.
On the 10 December 2021, the developer sought to keep the option alive by making a fresh application and claimed that the option period would extend once again.
The wording of the option period was fairly precise, and the judge agreed with counsel for the landowner that the agreement should be literally construed so the extension clauses could only operate within the original option period as extended by the Deed of Variation.
In summary, it is important to set out in the option agreement all the circumstances where the extensions will operate. It will need to clearly state whether a developer can lodge a fresh application during the extension period to keep the option agreement alive. A landowner, however, will also need to be aware of how a developer can manipulate the extension by lodging a fresh application close to the expiry of the option period, when such period has already been extended.