Options and pre-emption rights

A ‘call option’ is a contractual right to require the owner of land to sell it to the option holder.

A ‘put option’ is a contractual right for the owner of land to require another person to buy or accept a transfer of it.

Both types of option create unilateral rights. There is no obligation on the option holder to exercise his right, but if he does so then the other party is bound to perform his part of the bargain.

Options are contracts for the sale of land within Law of Property (Miscellaneous Provisions) Act 1989, s 2 (LP(MP)A 1989). They must:

The option holder’s notice of exercise is simply a mechanism to trigger the obligation to sell or buy the land. The option holder has a unilateral right to exercise the option and so valid exercise of that right does not depend on both parties signing the notice.

Perpetuities

The Perpetuities and Accumulations Act 2009 changed the rules on perpetuities for instruments that came into effect on or after 6 April 2010. There is no longer any restriction on the duration of an option and the parties can agree that it can be exercised during any specified period. The old rule against perpetuities still applies to options contained in instruments which came into effect before 6 April 2010. This required the option to be exercised within 21 years from date of grant. If it was not exercised within this period the option was void (Perpetuities and Accumulations Act 1964, s 9).

Stamp duty land tax (SDLT)

A ‘call option’ creates an equitable interest in land. Consequently, even if there were no specific statutory provision SDLT would be payable on an option fee if it exceeded the relevant threshold.

A ‘put option’ does not create an interest in land. Finance Act 2003, s 46 specifically brought ‘put options’ (and rights of pre-emption) within the scope of the tax. It states:

The acquisition of:

is a land transaction distinct from any land transaction resulting from the exercise of the option or right.

They may be 'linked transactions'. This is an anti-avoidance measure. While put options and rights of pre-emption are expressly within the scope of SDLT tax is payable only on consideration passing from buyer to seller. 'Put options' are rarely structured in a way that involves payments going in that direction.

If the fee payable for the grant of a 'call option' exceeds the relevant SDLT threshold tax is payable on that fee. If the option is exercised then the fee paid on grant of the option is added to the price paid for the land and, if over the threshold, tax is paid on the aggregate sum.

Land registration

'Call options' are ‘estate contracts’. Options granted in respect of:

Where the land is registered a notice should be entered even where the option holder is in actual occupation. The Land Registration Act 2002 (LRA 2002) significantly reduced the protection afforded by actual occupation so that it relates only to land that is physically occupied by the option holder.

A ‘put option’ is unilaterally exercisable by the owner of the land. Unless and until it is exercised, the potential buyer has no right over or interest in the land, so there is nothing that can validly be protected on the register. By contrast, LRA 2002, s 115 makes special provision for rights of pre-emption, treating them as an interest in land from the date on which the right is granted.

Contractual rights of pre-emption

A contractual pre-emption right requires the landowner, should he decide to sell, to offer it to the holder of the right for a fixed price (specified in the pre-emption agreement) or at a price to be ascertained by a market valuation or by reference to a formula. In some cases the holder of the right is simply entitled to be told of the landowner's wish to sell so that he has an opportunity to make an offer that may be accepted or rejected by the landowner.

There is doubt whether a right of pre-emption is a 'contract for the sale or other disposition of an interest in land' for the purposes of LP(MP)A 1989, s 2. In one case, a majority of the Court of Appeal considered that a right of pre-emption 'matures' into a proprietary interest when the landowner decides to sell. Despite continuing doubts and criticism of that ruling, best practice is to ensure that the contract creating the right of pre-emption, and any sale contract resulting from it, complies with LP(MP)A 1989, s 2, and that it is supported by consideration.

LRA 2002 provides that a right of pre-emption in relation to registered land has effect from the time of creation as an interest capable of binding successors in title. That right can (and should) now be protected by entry of a notice.

Statutory rights of pre-emption

The tenants' right of pre-emption under Landlord and Tenant Act 1987 (LTA 1987) applies to:

Although primarily aimed at residential property, LTA 1987 can affect mixed use schemes where commercial parts account for no more than 50% of the floor area of the building (excluding common parts). Typical examples are buildings with ground floor commercial premises and flats on the upper floors.

'Qualifying tenants' are leaseholders and most fixed or periodic tenancies. Shorthold or assured tenancies, business and agricultural tenancies and service occupancies are excluded. Anyone holding three or more flats in the building (as leaseholder or tenant) is also excluded.

Where the right applies the landlord must not contract to sell or grant a lease out of its interest without first serving an offer notice on the qualifying tenants. That offer notice sets out the terms of the proposed transaction and allows the tenants time to consider accepting it themselves. The landlord cannot sell to anyone else during that time, nor offer the property to anyone else at a price less than that proposed to the tenants or on different terms.

If the landlord sells without following the LTA 1987 procedure, the tenants can serve a notice on the new owner demanding details of the transaction, including the price paid. They can then take action to force the new owner to sell to them at the price he paid.

The price is set by the landlord, or by auction where the landlord decides to sell that way. There is no right for that price to be determined by a Leasehold Valuation Tribunal or anyone else. However the landlord cannot sell or offer the interest to another party on different terms or at a lower price than that originally offered within 12 months of his notice, unless he again serves an offer notice to the tenants on the new terms.

LTA 1987 does not define a 'building'. While generally understood to mean a separate structure or part of a structure which can be divided vertically from another part, it can also include schemes comprising more than one 'building' where they share common services or amenity areas.

LTA 1987 does not apply to:

LTA 1987 applies when the 'immediate' landlord of the tenants decides to sell. Where a landlord has a lease for less than seven years (or longer, but which is terminable within the first seven years) the superior landlord is also subject to LTA 1987.

LTA 1987 applies and must be followed where the landlord is disposing of any part of his interest in the 'building'. This can include the grant of leases for roof space and other ancillary areas (eg to electronic communications operators).

Where property to be sold or let includes any residential element, check whether LTA 1987 applies. If it does then failure to follow its procedures is a criminal offence, while following those procedures can add 4-6 months to the transaction timetable.