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An option to purchase real estate is a contract by which an owner of real estate agrees with another person that the latter shall have the privilege of buying the property at a specified price within a specified time. However, no obligation to purchase is imposed upon the person to whom the option is given.
An optionee is one to whom an option is given and an optionor is one who gives an option.
It is sometimes difficult to distinguish between an option and a contract of sale. If both parties are obligated to perform, then it is a contract of sale. If just one party is obligated to perform, then it is an option. An option is thus a unilateral contract in which the optionor/offeror agrees to make the offer irrevocable for a certain time in return for the optionee/offeree's performance of payment of the option money. When the optionee gives the appropriate notice of intent to exercise the option, the optionee accepts the offer and there is then a bilateral contract for sale with both parties bound to perform.
The option to purchase may be created and contained in any of the following instruments:
The rule against perpetuities does apply to options in gross. In regard to lease options contained in leases, the present trend of the courts is to exempt options in business leases from the operation of the rule. Specific state law and judicial dicta must be considered in this respect.
In certain cases, options to purchase, either embodied in separate agreements or set forth in leases, are subject to rejection and impairment under the provisions of section 365 of the Bankruptcy Code.
Any option to purchase the property to be insured, either recorded or unrecorded, must be shown as a title exception in Schedule B of the commitment and in the title policy.
In certain situations, the deletion of the exception may present some difficulties. Under no circumstances should reliance be exclusively placed on the fact that the stated time for the exercise of the option has expired. If this is the case, and in order to avoid showing the exception, it will be necessary to ascertain that:
Option to Purchase In Gross
Options to purchase in gross are uninsurable unless under state law such an option would be considered an interest in real estate.
Options to Purchase Contained in a Lease
In considering the insurability of an option to purchase contained in a lease, in conjunction with the insurance of the leasehold, the following matters should be ascertained:
The insurance of the option may be accomplished by endorsement to the ALTA owner's policy--1970, 1987 or 1990 version, the ALTA leasehold owner's policy--1975, 1987 or 1990 version.
When insuring the priority of an option, approval must be obtained from the appropriate legal counsel of the company.
Consider the following specific exceptions:
A convertible mortgage is a form of mortgage that combines the features of traditional mortgage debt and equity ownership into a single relationship between borrower and lender. In one form of this type of financing devise, the lender receives not only a mortgage to secure the loan but also an option to purchase all or part of the borrower's property. The mortgage and option may be part of the same document or they may constitute separate documents. The option may run directly to the lender or to a subsidiary or agent of the lender. The purpose of the option may consist in buying part of the real estate or in buying an interest in the mortgagor's legal entity (corporation or partnership).
Options to purchase contained in mortgages involve special and highly technical risks which may cause the option to be invalid. When the mortgage being insured contains an option to purchase, special care should be exercised not to include the option in Schedule A of either an owner's policy or a loan policy or an endorsement thereof or to include any special wording into the policy relative to the enforceability of the option.
Prior approval to insure options must be obtained from the appropriate legal counsel of the company.