The option to purchase real estate is a contract by which an owner of real estate enters an agreement with another allowing the latter to buy the property at a specified price within a specified time, or within a reasonable time in the future, but without imposing an obligation to purchase upon the person to whom it is given. In other words, the option to purchase real estate is a unilateral pre-contract, in which one party grants the other the exclusive power to decide on the conclusion, or non-conclusion, of the main contract of sale, to be carried out within a certain period and under certain conditions, and may also be accompanied by the payment of a premium or fee by the opting party.
It is a consensual agreement, that is, it is perfected by mere consent of the parties. The sale of real estate in a certain term is completely defined and depends only on the opting party that is perfected or not. If the opting party exercises its right of purchase option, it activates the validity of the pre-contract and the other party, the grantor, has the legal duty to complete it.
The option agreement can be independent or linked to another, usually lease.
The option to purchase real estate compared to other similar types of contract
• Contract subject to suspensive condition. What decides the final effectiveness of the option contract is the willingness of the opting party, whereas, in the contract subject to a suspensive condition, it is a random and external event, on which the parties do not have a decisive influence (for example, the concession of mortgage).
• Contract subject to suspensive termination. As in the option contract, there is a perfected contract. The difference is that while in the option one of the parties reserves the power to give consent, in the contract subject to term, the effects of the contract are deferred upon the arrival of a certain day (for example, it is agreed that the payment is subject to the granting of a building permit).
• Promise to sell. In the promise to sell the parties only oblige themselves to give their consent later, that is, to sell and buy through the granting of a subsequent contract of sale; contrarily, in the option contract the granting party has fully offered the sale, which will be perfected once the opting party exercises its right (without the need for a new consent by the granting party). In addition, in the promise to sell, both parties can reciprocally oblige each other to comply, while in the option only the opting party has that power.
• Unilateral promise. It is the formal declaration of a person to be willing to sell a specific property, for a certain price and for a time also preset. The unilateral promise to sell can be aimed at a person, or at a collective.
The promise differs from the option in two elemental points: in the purchase option the granting party grants to a single beneficiary the exclusive power to decide, while in the unilateral promise the offer to sell is addressed to everybody; On the other hand, while the option is a true contract between two parties, the promise is constituted solely and exclusively by a single declaration of will.
• The right of first refusal. In the option contract, the opting party has a deadline to decide whether to make the acquisition, and the grantor depends on what the opting party decides. In the right of first refusal, the acquirer is in a situation of dependency, until the owner of the property decides to sell it and closes a deal for it; at that time, and not before, he may exercise its right and acquire the property, for having a preferential right. In addition, option and Right of first refusal differ because in the option the price is freely set by the parties, while in the Right of first refusal the price is the one that is willing to pay a third party.
Elements of the purchase option
The grantor of the option is already bound to the later agreement. Therefore, the elements of this must be foreseen and agreed in the option contract. They are:
1. the granting to the opting party of the right to decide the completion of the sale unilaterally;
2. the determination of the property object of the sale;
3. the indication of the price stipulated for the future acquisition, as well as the amount of the fee or premium ( if it had been agreed in the contract).; and
4. the establishment of a term for the exercise of the option.
Form of the contract
The applicable principle is freedom of form, and it should be in writing for purposes of proof.
When the option is configured as an independent contract, it is necessary to comply with the formal requirement of the definitive agreement.
As an exception to the above, the purchase option must be documented in a public deed if it is to be registered in the Property Registry. Thus, the purchase option contract for a property can become registered in the Land Registry and, therefore, enforceable against third parties, provided that the term of the option does not exceed four years.
Obligations of the parties
Unless the payment of a premium by the opting party has been agreed, the purchase option only creates obligations for the grantor, which is obliged to:
1. not to sell the property subject to the option contract to third parties.
2. to maintain the validity of the offer during the established period. Within this period, the opting party may or may not use its right. If he does, the contract of sale becomes automatically perfected from that moment and for that single fact.
3. to grant the public deed of purchase and sale from the moment in which the opting party exercises its right of option, within agreed terms and conditions.
An essential characteristic of the purchase option is that it does not need any subsequent activity of the parties to develop the contract of sale, being sufficient the expression of the willingness of the opting party so that the sale is definitive, perfect and in a state of execution, obligatory for the Grantor.
The opting party is entitled to decide unilaterally on the conclusion of the contract. The decision to not exercise his option right does not generate an obligation to compensate damages for breach; the effect it normally produces is that the grantor appropriates the amount delivered as a price for the option.
The option contract can not affect other co-owners who have not intervened in it. If the consent is granted only by one of the co-owners, the pre-contract as such is valid, and only the person who intervened will respond in front of the opting party.
Transfer of the right of purchase option
Unless it is contrary to the laws, the moral or the public order, it is legal that one of the parties to a contract may, with the consent of the other party to the contract, be substituted by a third party unless the obligations to fulfill be of a very personal nature.
The essence of the contractual position transfer is the replacement of one of the parties to the contract maintaining the contractual relationship. It requires the consent of the other contracting party that remains in the legal relationship, which requires three contractual wills (first opting, second opting, and granting party).
The exercise of the option right
The purchase option can be exercised unilaterally by the opting party, without the need for a new consent by the grantor. The grantor once received the notification from the opting party willing to exercise the right, is obliged to comply. He must cooperate for the formal conclusion of the contract of sale, which arises from that moment of the notification.
The term of exercise of the right of purchase option
The exercise of the right is the last act of execution of the option contract, that is, its consummation and, as a consequence, the termination of the contractual relation of the option.
The mere passing of the term, without exercising the right of option, extinguishes both the right and the contract; The ineffectiveness of the contract, of course, also causes the extinction of the right of option.
The parties are free to set the exercise term of the option. For the option to be registered in the Land Registry, it is required that the term does not exceed four years (in a lease with option to purchase).
In addition, the option contract is extinguished by the general causes of extinction of the contracts. The inactivity or passivity of the opting party during the agreed term is an efficient cause for the disappearance of the contractual relationship and of the right itself. After the expiration of the term, the contract is terminated, the right declines and the grantor retain the premium if foreseen.
Renounce to the option right
The right of option may be renounced, when it do not conflict with public interest or order, nor harm third parties. The renunciation must take place before the extinction of the right of option and must be clear, definite and unequivocal, and expressly stated for this purpose.
Land Registry Access
The purchase option contract, or the agreement that establishes it in another contract, can be registered in the Property Registry, provided that it meets the requirements consisting of:
1. that the parties have expressly agreed to register.
2. that the price of the acquisition of the property and the premium to grant the option right are contained in the agreement.
3. that the term established for the exercise of the option, which cannot exceed four years, be reflected. In a lease with option to purchase the duration of the option may be that of the entire term of the principal contract but will expire in the event of a tacit or legal extension of the lease.
The inscribed purchase option is enforceable and valid against third parties.