Option agreements - keep your finger on the trigger!
Option agreements are particularly useful in the context of strategic land buying where the developer hedges its bets by taking an option over land which has not been identified for development, but which has a reasonable chance of being allocated or released for development in the future.
Another attraction is that an option might entitle the developer to buy land at a discounted price where the value of the land has not been market tested. Once planning permission has been granted, the landowner may have second thoughts about selling the land at an undervalue, which is when the terms of an option are carefully scrutinised to see if the sale can be avoided.
By looking at the Court of Appeal case of Fishbourne Developments Ltd v Stephens  we will show how important it is to consider the drafting of an option to ensure that it can be exercised, particularly where the original parties have sold on and the current parties no longer agree.
Facts of the case
Fishbourne Developments (F) acquired the benefit of a 2002 option agreement over 117 acres of farm land outside Chichester, now owned by Anne Stephens. The option agreement provided that the option to purchase would be triggered: “if and when the Purchaser obtains a Planning Permission”. F was now the “Purchaser” and Planning Permission was defined in clause 3.5 as “a planning permission granted by the local Planning Authority permitting any development of the Property.”
In 2016, F obtained planning permission for a new pitched roof on one of the agricultural buildings and claimed that this permission was sufficient to comply with clause 3.5. This meant that F could buy the Property (the whole of the farm) at a 30% discount from the open market value.
The High Court took the view that the words “any development of the Property” meant a planning permission for development of the whole or substantially the whole of the property by the erection of a new building or new buildings involving a change of use from agricultural use. Therefore F’s planning permission for the new roof was not sufficient to trigger the option as it did not constitute “development”.
With time running out for F to exercise the option which would expire on 31 December 2020, F appealed to the Court of Appeal who heard the case remotely.
Court of Appeal decision
F submitted that “development” meant anything which fell under the wide definition in section 55 of the Town and Country Planning Act 1990, which includes building operations, alterations, demolition as well as material change of use. Accordingly, the erection of the new roof was “development” as per clause 3.5 and so F argued that it could exercise its option.
The Court of Appeal disagreed and dismissed F’s appeal. It held that anyone looking at the 2002 option would not think that it was ever intended that an inconsequential planning permission would constitute “development” as this would make very little commercial sense, bearing in mind the size of the discount and the lack of any overage provision. The court concluded that the words “any development of the Property” meant that planning permission had to be obtained for development of the whole or substantially the whole of the farm. This was consistent with the farm being defined in the option as the “Property”.
We do not know whether much if any legal advice was taken by the original parties before entering into the option agreement and this case serves as a reminder of the consequences of not doing so. There was no doubt that the 2002 option agreement was poorly worded; its main failing being that it did not define what was meant by “development”, leaving the parties to put forward opposing views. This crucial term was capable of more than one interpretation and the court chose the one which made the most sense in the circumstances, even though it was much narrower than the statutory definition.
The events which trigger an option should be carefully considered so the parties do not end up in expensive litigation arguing over the meaning of the terms. The outcome in this case would have been different had the parties considered three main points:
- the specific type of development that would trigger the option, for example, residential development or a wider mixed use;
- whether the option applied to the whole or part of the farm by clarifying the extent of the land included; and
- whether the grant of planning permission would suffice or the physical implementation of it, for example whether reserved matters approvals are to be obtained or pre-commencement conditions discharged.
There are a number of key issues which landowners and developers need to think about when entering into an option agreement and, as this case shows, taking specialist legal advice should not be considered as optional.