The price payable for option land may be specified in an option agreement. Alternatively, where the option will subsist for years, the parties will usually agree to calculate the price when the option is exercised. Particular care is required with the valuation formula in such cases, because the property market is cyclical and it is difficult to predict how property values will change.
In particular, where the price of land will be fixed by a valuation that will take place on a date in the future, it is important to specify a valuation date to put paid to disputes caused by fluctuations in market value.
In Redlawn Land Ltd v Cowley [2010] EWHC 766 (Ch); [2010] PLSCS 277, the option agreement prescribed a two-stage process for the exercise of the option. Following the grant of planning permission, the option holder was entitled to activate a mechanism to ascertain how much the land was worth. When the price was ascertained, the option holder had the right to exercise the option and buy the land.
Unfortunately, the option agreement did not specify a valuation date and land values had fallen. The landowners argued that the valuer should value the land on the date of the notice requiring the appointment of an expert to determine the price. They said that this was fair because it would prevent either party from delaying the process deliberately, to take advantage of increases or decreases in market value.
The option holder argued that the valuation should reflect land values on the date when the value of the land was assessed. It claimed that it would be unnatural to value the land except by reference to current prices, because this was the closest practicable date to the exercise of the option and any resulting contract for sale.
The judge ruled in favour of the option holder. He decided that it would be more natural to expect parties to agree to fix the price by reference to current market values, rather than to require a retrospective valuation. It was impossible to select the date on which the option was exercised as the valuation date because the parties’ contract required the valuation to take place beforehand. Consequently, the latest available valuation date was the date on which the valuer actually determined the price.
Practitioners may have different views about the outcome of Redlawn. However, it is often sensible to select a valuation date that is close to the date on which a valuation is being made to avoid difficulties when trying to pinpoint historic values. In addition, if an option agreement directs the valuer to assume that the parties have had a reasonable time to market the land and/or negotiate the price, it may also be advisable to include a further assumption that property values will remain static throughout such period.
Allyson Colby is a property law consultant
