People buying and selling land often use ‘option to purchase’ or ‘pre-emption’ agreements to commit the other party in the transaction to the sale. While the two agreements may seem similar, they are in fact significantly different.
What are option to purchase and pre-emption agreements?
With option to purchase agreements (also known as a lease option), the buyer is given the right to buy the land for a certain period of time, and it may be subject to certain trigger events. If a specified event occurs, the buyer has an absolute right to purchase the land.
Under a pre-emption agreement, however, the prospective buyer has the right to be first in line to buy the land, if the owner decides to sell within the pre-emption period.
An option to purchase agreement, therefore, gives the buyer rights over the land, and will also bind a future owner of the land too.
Under a pre-emption agreement, however, it is up to the landowner to ‘trigger’ the agreement, and if they decide not to fulfil the conditions of the agreement, the pre-emption rights will not come into effect. Pre-emption rights in regard to registered land take effect at the time of their creation, however, and can therefore be binding on subsequent owners.
Under English law, option to purchase agreements must be in writing in order to be binding, as they are conditional contracts for the sale of land.
Pre-emption agreements do not need to be in writing, although it is wise to do so. Under a pre-emption agreement, the contract only comes into effect when the trigger event occurs and the holder can then make their offer to purchase. The landowner must then accept this and at this point, the contract must be put in writing. There are also different tax implications of both options to purchase agreements and pre-emption agreements, so it is advisable to take professional advice when negotiating.