I recently attended on of Mark Rolton's one-day presentations during which he outlined some of the strategies he uses to secure properties whilst he is investigating their development potential.
One of those strategies is to insert a clause in the option agreement that allows for the premium, or deposit, to be refundable should he not proceed with exercising his right to buy.
To me, this sounds like a condition that is wildly unfair to the landowner, but given Rolton's success with the property development business, I'm wondering whether the clause only seems unfair because of my lack of experience.
Has anyone seen this refundable deposit clause used?
The only time a condition is unfair in contract design is when one party has a disproportionate influence over the conditions and uses that unethically. Ethics are however not a legal requirement as such (although unreasonable/unfair contracts can be remediated by the courts in some circumstances) and one usually uses what advantage they can garner to negotiate a favorable outcome for their side without it being too onerous for the other side.
Hmm, can't imagine Rolton sending his boys round to wield disproportionate influence.
The clause completely removes any risk from the option taker.
What I meant to ask was how common it is for this clause to be included in option contracts?
Impossible to tell. It's highly dependent on the option seller. While options have similar structural qualities they are rarely identical. An option is simply a form of contract which requires an offer, an acceptance and a consideration. Deposits fill the consideration component in a tangible way and generally strengthen the contract obligations. It is unusual for deposits to be lost when conditions that are required to be met do not eventuate especially when there is no fault by either party. Placing a holding deposit does not automatically mean it is forfeit when a deal fails for whatever reason.
Deposits that are subject to forfeiture conditions are usually quite small and or have other conditions attached that allow the depositor to accomplish something in return for forfeiture. People who forfeit deposits for no good reason are usually amateurs or mugs.
I couldn't imagine any solicitor (for the seller) allowing this.
What's to stop the buyer putting options on thousands of places then later just choosing ones that are financially viable? Nothing!
Catalyst wrote:I couldn't imagine any solicitor (for the seller) allowing this.I wouldn't engage any solicitor that tried to give me business advice or told me what I could or couldn't do. They're there to advise on the legal aspects of a transaction not its business potential.
I subsequently heard Rolton in an interview, justify the refund ability clause by saying (words to this effect) why should I be penalised for trying to add value [through gaining a development approval] to the seller's property? He also claimed to have never had a a development application refused in his 11 or 12 years of operating in this way.
It's fairly common approach. A see potential in B's land and thinks it can be developed but needs to confirm this before buying. Given the time and cost involved A looks for an option contract to protect his DD costs and time involved by offering to pay B compensation to wait provided the DD shows the deal is doable. A pays the option price plus purchase costs when the contracts are signed.
A better approach rather than paying deposits although the tangible exchange of money can strengthen the deal but I personally would rather see the deposit sit in escrow in this situation.
I have an old friend who is in the middle of something similar in that a Sth Korean has paid a 50% deposit so far to purchase a large land parcel (was a dairy farm) to develop into a golf course with private residential subdivision. The Korean is at risk of substantial losses given he has failed to complete this deal on time (having trouble raising the balance) but my friends family are not under any pressure so are letting this ride for the time being. Personally not what I would do but money isn't a problem for them and they're so laid back it's not funny.
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