MAGAZINE BLOG

The Option Agreement Trap

Posted on April 01, 2021

 

Signing could mean you’re all out of options

 

By John Goudy

“By signing the option, you have effectively signed the agreement and accepted the project.”

If you’re familiar with professional team sports, you may have heard the terms “team option,” “player option” and “mutual option.”

When a player’s contract includes a team option, the team gets to choose whether to exercise the option to keep the player for another season beyond the guaranteed years of the contract. With a player option, it’s the player who decides whether to exercise the option and stay for another year or whether to become a free agent (in which case the player can choose to re-sign with the same team or sign with another team).

With a mutual option, both the team and the player must exercise the option in order to extend the stay of the player under the existing contract.

Option agreements are common in pro sports. They’re also common when it comes to land deals and they work in much the same way. Think of the land as a team and the landowner as the team ownership. The player in this scenario is the person or company looking to use the land, whether by way of leasing or purchasing it.

 

Locked in

The player approaches the owner and offers to enter into an option agreement. If the option is exercised, then the player will get the right to join the team (i.e. use the land). Many landowners are asked to enter into option agreements with pipeline companies, solar and wind energy companies and other project developers.

What is vitally important to remember is that the option agreements proposed to landowners are “player options,” not “team options.” If you, as the landowner, think you can sign the option and then decide later on down the road whether you want to go through with a project on your land, think again. It’s the project proponent who has the “option” to follow through with the project. As soon as you sign, you are locked into the agreement that has been proposed (a lease, an easement, etc.), subject only to the project proponent exercising its option. By signing the option, you have effectively signed the agreement and accepted the project.

And what does the landowner get in return for granting the option? Sometimes there is a (relatively small) monetary payment. That’s nice. But the project proponent usually gets not only the right to enter into the lease, easement or other agreement at its option down the road, it often also obtains a right of entry to your property even before it exercises its option. The project proponent may be getting rights to explore, carry out testing or conduct other investigations and activities on your property. Is the payment still worth it?

Should landowners sign option agreements? Not without getting good legal advice on the nature of the option and the eventual agreement to be made. And not without knowing exactly what project is being proposed for your property.

 

Keeping their options open

All too often, landowners think they are getting a certain type of project and end up with something different. A land agent tells the landowner that the leased area will be in X location, but the project is eventually constructed in Y location.

Project proponents want to keep their options open (no pun intended), so they will include clauses that state that the specifications of the project facilities on your land will be determined by the company (at its sole discretion) later. Classic bait and switch.

So, should landowners sign option agreements? Maybe.

Maybe if the upfront option payment is large enough to warrant tying up your property with a project that may not ever come to fruition — some options stay open for years. And only if you have the firm written agreement of the project proponent as to what the project is going to entail.

Remember that you cannot rely on the representations made by company representatives and land agents unless those representations are in writing and form part of your agreement with the proponent. “Entire Agreement” clauses are included by companies so that they don’t have to honour what representatives and land agents have told you at the kitchen table. The written agreement you sign is what governs.

 

Approach with caution

Do your homework — your due diligence. If a company approaches you with an option agreement, ask questions and insist on having a full understanding of the project and how it will affect your property. Insist on getting a legal opinion on both the option agreement and the project agreement (lease, easement, etc.). If the company won’t agree to pay for an independent legal review, or won’t agree to pay for the review unless you sign, this may be an indication that you’re best to pass on the project.

And another thing about options: the company you sign with initially is often not the company that will carry out the project. You may hear all the right things from the land agent who signs you up to the option agreement, but then the option is assigned to another company you’ve never heard of, and it’s that company that carries out the project.

Unsurprisingly, the new company claims never to have heard of the various promises made to you by the land agent. It’s not fair to say that no option agreement can be a fair option for the landowner, but landowners need to be very careful in dealing with options. Approach them with extreme caution and a healthy dose of skepticism.

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John Goudy is a litigator whose practice is focused in the areas of commercial and environmental litigation, expropriation law, energy regulation, and regulatory offences. He is particularly interested in agricultural issues and the regulation of agricultural land use. He lives and works on his family’s cash crop farm north of London, Ontario, with his wife and three kids.

Published in PIPELINE OBSERVER Winter 2021