Option agreement top tips | landlord’s lender’s consent

02 Apr 2019

The second in our series of key points for developers to consider when entering into option agreements looks at the issue of Lender’s Consent. 

In our experience, developers don’t always want to obtain consent from the owner’s lender to the option agreement, the rationale being that obtaining the consent often delays the exchange of an option agreement.  However the risks of not obtaining a lender’s consent to an option agreement include:

  1. The terms of the landowner’s mortgage are likely to prohibit the grant of an option agreement and therefore if a landowner enters into the option agreement without the consent from a lender, they will be in breach of the terms of their mortgage, and consequently a lender can exercise its power of sale. 
  2. If a lender exercises its power of sale and hasn’t consented to the option agreement, they can sell free of the option agreement.  This means that a developer could go to the expense of obtaining planning permission only to find that they can’t buy the site. 
  3. If a lender does not enter into an option agreement where a landowner is only selling part, there is a risk that the lender won’t agree to provide a Discharge of Part and will insist on the entire mortgage being redeemed.  If the purchase price does not exceed the outstanding loan this may mean that the landowner cannot provide a discharge of their charge and the developer cannot register the transfer. While the developer may have a breach of contract claim against the landowner, litigation is always best avoided. Best practice is therefore to get the lender on board before exchange so you know there will be no issues.
  4. If a lender does not enter into an option agreement, a developer cannot require the lender to enter into a s106 agreement (if required).  S106 of TCPA 1990 requires any party with an interest in land to enter into a s106 agreement (which a lender has). Therefore, if a planning agreement is required to obtain planning permission, it would mean that a developer would not be able to obtain their planning permission.   

Our advice? We would always recommend that a lender’s consent to an option agreement is always obtained.

For more information or advice, please contact Isabel Alderton-Sell.

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