What are the differences between an option to purchase and a right of pre-emption?
Option to Purchase
This gives a buyer the right to serve an option notice on a seller during the option period, which requires the seller to sell the property to the buyer, within a certain period of time after valid service of the option notice.
If the buyer serves such a notice, it must usually pay an agreed deposit at the same time. Upon valid service of the option notice a binding contract occurs on terms set out in the option agreement.
A buyer may want an option to purchase rather than a pre-emption right so that it can make sure that the seller has to sell the property at the point that the buyer chooses to buy it. An option agreement would ensure that the property cannot be purchased by others during the option period and steps should be taken to protect the option right by registering such on the seller’s title. A seller may want an option to purchase as it can charge the buyer consideration under the option agreement for granting the option.
When negotiating the option to purchase, the parties should consider the following main items:
• The length of the option period.
• If there is to be an option sum.
• The deposit and purchase price or method of calculation.
• What the seller is able to do with the land prior to exercise of the option e.g. consider items which may affect the value but also which could affect the seller’s ability to deal with the land as it wishes.
Right of pre-emption
A right of pre-emption is different to an option to purchase in that the property will only be offered to a buyer if an owner wishes to sell it during the pre-emption period. There is no obligation on the buyer to purchase the property unless they want to. It is essentially an owner giving a buyer a right of first refusal to buy the property if the owner wants to sell this. The buyer cannot force the owner to sell the property.
If an owner wants to sell the property during the pre-emption period, it must serve an offer notice on the buyer to offer to sell them the property, the buyer then has a certain period of time to accept the offer by serving an acceptance notice. If an acceptance notice is validly served then a binding contract occurs for the owner to sell the property to the buyer on terms set out in the pre-emption agreement. If a buyer does not serve an acceptance notice in the period required, the landowner can sell the property to other parties in accordance with the terms of the pre-emption agreement.
A landowner may prefer a right of pre-emption rather than an option to purchase so that it cannot be forced to sell the property to the buyer unless it wishes to sell.
When negotiating a right of pre-emption, the parties should consider the following main terms:
• The length of the pre-emption period.
• If there is to be a pre-emption sum.
• The deposit and purchase price or method of calculation.
• Who the property can be sold to and on what terms (if a buyer does not accept the offer to purchase).
If you’re considering whether to grant an option to purchase or right of pre-emption and would like guidance, please don’t hesitate to contact our Commercial Property team.
(July 2022)