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:
- Distinct and specific instrument (Option in Gross)
- Deed (Right of Repurchase)
Rule Against Perpetuities
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.
Bankruptcy Impact On An Option To Purchase
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.
Options To Purchase As Exceptions
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:
- The option has not been exercised.
- The option has not been extended or renewed.
- The optionee is not in possession of the property
Insuring An Option
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:
- Whether the option is recordable under state law so as to constitute constructive notice.
- Whether the option violates the rule against perpetuities in the particular jurisdiction.
- Whether the instrument states the purchase price (since otherwise the option would be void).
- Whether the lease in which the option is contained is a valid lease.
- Whether the option period has not expired.
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:
- Disaffirmance of the option under the provisions of the Bankruptcy Code.
- The failure of the optionee to receive all or part of an award entered in a condemnation proceeding unless failure to share in the award stems solely from a court order or judgment which constitutes a final determination and adjudges the option invalid or incapable of specific performance.
- The failure of the insured at the time of payment of the option price either to have obtained proper conveyance and releases from all persons then having an interest in the land or a lien or encumbrance thereon (the determination as to the identity of such persons and the nature of the interest, lien or encumbrance owned or claimed, to be at the expense of the insured) or to have obtained a court order or judgment which constitutes a final determination and determines those persons and interests entitled to receive the option price.
- Attorneys' fees and costs in connection with the proceedings mentioned immediately above or in connection with an action to enforce the option, excluding attorneys' fees incurred to defend an attack on the validity or enforceability of the option.
- Any lien or right to a lien, imposed by law for services, labor or material heretofore or hereafter furnished.
- Such liens or encumbrances that would affect the insured had the insured been the owner of the fee simple title instead of an option as of the date of policy, including without limitation real estate taxes, special assessments, demolition liens, drainage liens and water liens.
Option To Purchase Contained In A Mortgage
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.