Introduction
This article explains pre emption rights for prospective purchasers and vendors of land, or real property. The article will be useful to anyone considering buying or selling with either an option to purchase or a pre-emption right and it will be especially useful to those considering which of the Net Lawman option agreements to purchase.
The Net Lawman option agreements and pre-emption documents are listed at the end of this article.
Why use a pre emption or option?
Prospective purchasers and vendors of land often want to ‘lock in’ the other party to the deal for obvious reasons. This is done by using either an option agreement or a by granting a pre-emption right, both of which have similar purposes, however, the effect of each at law is significantly different.
Note, a pre-emption right is often called a ‘right of first refusal’ because it prevents or restricts the landowner from entering into a land transaction with parties other than those to whom the right is granted until those people have declined the offer.
Option, pre-emption or conditional contract?
Under an option to purchase agreement, the purchaser is given the right to buy the land.
If the right is subject to the occurrence of a certain event(s), the agreement is often called a ‘conditional contract’. Where a conditional contract is agreed, the parties’ agreement is complete on the happening of that event. Quite frequently, contracts for real property are subject to a grant of planning permission. This will often be the conditional event in a conditional contract. When an option is granted however, the purchaser has the choice about whether or not to exercise the option.
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.
Differences between options and pre-emption rights
1. Does the right or option bind future parties?
Under an option, an immediate right is created over the land. So an option will 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 benefit from the agreement. (Note however, that pre-emption rights in regard to registered land take effect at the time of their creation and can therefore be binding on subsequent owners.)
2. How is the option or pre-emption right created?
An option must be made in writing because, in English law, it is an ‘estate contract’ which means that it is also a contract for the sale of land. 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. Of course that is not to say the sale contract not be made in writing. There are two different agreements here – one agreement for the pre-emption right and another for the sale of land, if the purchaser chooses to sell. Of course, the latter is a contract for the sale of land and must be made in writing.
3. How long can an option or pre-emption right last?
An option can last only for 21 years. A pre-emption right can last for the lifetime of the grantor.
The use of options and pre-emption agreements also create somewhat different tax positions which are discussed briefly below. We suggest you contact us for Expert Legal Advice should you require more advice.
Tax considerations
Stamp Duty Land Tax (SDLT) comes into play on the formation of an option or right of pre-emption in respect of land transactions.
Note, any later exercise of an option or right to pre-emption will give rise to a separate land transaction chargeable to stamp duty land tax in its own right. Although the exercise is a distinct transaction it will be linked to the earlier grant of the option or rights of pre-emption.
Options fall within stamp duty land tax even if the grantor can discharge his obligation either by entering into a land transaction or in some other way, for example by payment of money.
At the time of the formation of the option or right, stamp duty land tax is charged on the option price at the rate applicable to that price. If and when the option or right is exercised, stamp duty land tax is charged on the price for the land in addition to the option (or right) price at the rate applicable to the total price. So although it seems like the purchaser has to pay twice, he is later given a credit for any SDLT paid at the formation of the option or right.
The grant of an option is not the acquisition of a major interest. So an option agreement in itself is not notifiable to HMRC unless there is stamp duty land tax to pay. However where the grant of an option is linked with its exercise may mean that the option becomes notifiable when the option is exercised.
Relevant Net Lawman document templates:
| 
