Option to build: Overview, definition, and example
What is an option to build?
An option to build is a provision in a real estate or construction agreement that gives one party (usually the buyer or developer) the right, but not the obligation, to construct or develop a property according to certain terms. This option typically allows the party holding the option (often a developer, investor, or business) to acquire the land or property and then build upon it at a later date, within a specified timeframe. The option often includes details about the conditions under which the construction may occur, such as zoning approval, financing, or other legal requirements.
In a broader context, the option to build might also be part of a commercial agreement where the option holder is allowed to build a structure or make improvements on the property, enhancing its value or suitability for specific use.
Why is an option to build important?
An option to build is important because it provides flexibility for developers or businesses to secure a property or land for future development, without committing to construction until certain conditions are met. It allows the party holding the option to evaluate market conditions, secure financing, or get necessary permits before proceeding with construction.
For landowners or sellers, granting an option to build can attract developers or businesses interested in their property without the need for an immediate commitment. The option holder typically pays an option fee or premium, compensating the property owner for providing the right to develop at a later date.
Understanding option to build through an example
Imagine a developer enters into an agreement with a landowner for a piece of undeveloped land. The developer is granted an option to build, meaning they can choose to purchase the land and begin construction within the next five years. During this time, the developer can assess whether the market conditions are favorable, secure financing, and obtain any necessary zoning or building permits. If the developer decides not to proceed with construction, they can let the option expire, losing only the option fee paid upfront.
In another example, a business might secure the option to build a new warehouse on an existing property they lease. The lease agreement may include a provision that allows the business to expand the facility at any time during the lease period, giving them the flexibility to add capacity if needed while retaining control over the decision to build.
An example of an option to build clause
Here’s how an option to build clause might appear in a contract:
“The Buyer shall have the option, exercisable at any time during the Option Period of five (5) years, to acquire the Property and initiate the construction of a commercial facility on the land. The Buyer must notify the Seller in writing of their intention to exercise the option. If the Buyer chooses not to exercise the option, the option will expire, and the Buyer shall not be obligated to purchase the Property. The Buyer shall pay an option fee of $X upon execution of this Agreement, which will be credited toward the purchase price if the option is exercised.”
Conclusion
An option to build provides flexibility for developers, businesses, or investors to secure the right to develop a property in the future without being required to immediately begin construction. This provision benefits both the party holding the option, who can plan and secure necessary resources before committing to construction, and the property owner, who receives compensation for granting this right. Whether in real estate or commercial contexts, the option to build is a useful tool to manage risks and opportunities in property development.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.