Option agreements and RZLT: top priorities for landowners and developers in Ireland

Option agreements are becoming increasingly common in the Irish real estate landscape. They can be a capital-light tool to secure development opportunities.

In this article, our Real Estate team details some of the key considerations to be mindful of when negotiating and drafting land option agreements. We outline important factors that both developers and landowners should address to help ensure clarity and protection of interests throughout the process.

In basic terms, an option agreement is a contract where a landowner gives a developer the exclusive right to purchase land, typically for a certain amount of time. This legal tool is especially useful for land that has the potential to be developed for residential or commercial use but may currently be agricultural or with a restrictive planning or zoning element.

Before entering into an option agreement, both parties should reach clear agreement on three key points: the purchase price, the option period, and who will be responsible for Residential Zoned Land Tax (RZLT).

The purchase price

In most option agreements, the purchase price for land is fixed from the date of execution, offering certainty for both the developer and the landowner. The following considerations should be given to the different types of land:

• Will some of the land be required for open spaces or roads?
• What will the purchase price / value be for these lands?
• Do you mix the purchase price element?
• If it is a longer-term option period, is it appropriate to link the purchase price to the consumer price index?
• If the land may be zoned in stages, do you stagger the purchase price ranges?   

Option period

Option periods are typically set for two to four years. Both the landowner and the developer need to reach a compromise on this aspect of the agreement. The landowner may be reluctant to tie up the relevant property in an option agreement for too long, especially if the value of the land is increasing. On the other hand, the developer may prefer a longer option period, which can offer flexibility depending on what other projects they have and the time needed to secure planning permissions or financing.

Finding the right balance in the option period is an important part of the negotiation to ensure both parties’ interests are addressed. Consider staggering the option period to ensure it is appropriate to the local development plan. This can be useful when dealing with multiple landowners. It is also important to consider when the period might trigger. 

Responsibility for RZLT liability

If Residential Zoned Land Tax is applicable to the land, it is important for both parties to reach a clear agreement on who will be responsible for this liability before signing the option agreement. With RZLT set at 3% of the market value of the land, the tax can represent a substantial cost, particularly over a longer option period. The option agreement should state explicitly whether the liability falls to the landowner, the developer, or if it will be split between the parties.

Addressing this issue upfront helps to avoid misunderstandings and ensures each party is aware of its financial obligations throughout the option period. There are multiple options which an experienced adviser can assist with negotiating.

Inhibition

We recommend developers ensure the option agreement is registered as an inhibition on title. An inhibition serves as a notice to the Land Registry that certain actions involving the lands - outlined in the option agreement - cannot take place without the developer’s consent. This helps ensure that third parties are aware that an option agreement exists.   

A light option or proper option agreement 

A two-page option agreement might feel easy and quick, but it can lead to lots of problems later if the parties fall into difficulty or uncertain territory with delays or gazumping. Carrying out proper legal due diligence on title, services, charges, inhibitions and other risks is time well spent when the option could become worth many millions of Euro in the longer term.

How Ogier can help

As option agreements can give rise to complex legal, tax and practical considerations, it is essential for both developers and landowners to seek expert advice at an early stage. Ogier's Real Estate team has extensive experience in advising on and structuring option agreements to ensure that interests are protected and potential pitfalls are avoided.

For further information, or to discuss your specific requirements, contact Ogier’s Real Estate team in Ireland using the contact details below.

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Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

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