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The downside of an option-to-purchase land agreement

This type of agreement doesn’t oblige an energy or utility company to buy the land

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The Farmers’ Advocate Office has received numerous inquiries on option-to-purchase agreements between landowners and the energy and utility sectors.

“It’s important that landowners are aware of the risks of option-to-purchase agreements,” said Jeana Les, research and communications specialist for the advocate office. “An option-to-purchase agreement locks a landowner into selling to a certain company at a certain price at a future date, but doesn’t obligate the company to buy the land.”

An option-to-purchase agreement is different than a right of first refusal. The latter commits a seller to offering property to a specified party first with the same price, terms, and conditions that they would otherwise be selling it at. While a right of first refusal can follow market trends, an option to purchase provides a static price for an unknown development.

“For the energy industry, option-to-purchase agreements provide companies with a low-risk investment,” said Les. “The company will arrange an option to purchase based on speculation for future developments. If the developments don’t come to fruition, it’s no loss for the company. However, if the land is developed, the company gets it for a set price that may not be reflective of current market prices.

“The option to purchase also precludes a landowner from making other arrangements during the specified time frame, so they may forgo other opportunities only to have the option to purchase turned down at the end of the term.”

The Farmers’ Advocate Office can be reached at 310-FARM (3276).

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