Nova Southeastern University NSUWorks Faculty Scholarship Shepard Broad College of Law Fall 1987 An Examination of Real Estate Purchase Options Ronald B. Brown Nova Southeastern University - Shepard Broad Law Center, [email protected] Follow this and additional works at: https://nsuworks.nova.edu/law_facarticles Part of the Property Law and Real Estate Commons NSUWorks Citation Ronald B. Brown, An Examination of Real Estate Purchase Options, 12 NOVA L. REV. 147 (1987), Available at: https://nsuworks.nova.edu/law_facarticles/106 This Article is brought to you for free and open access by the Shepard Broad College of Law at NSUWorks. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of NSUWorks. For more information, please contact [email protected]. +(,121/,1( Citation: Ronald Benton Brown, An Examination of Real Estate Purchase Options, 12 Nova. L. Rev. 147 (1987) Provided by: NSU Shepard Broad College of Law Panza Maurer Law Library Content downloaded/printed from HeinOnline Fri Sep 21 09:17:44 2018 -- Your use of this HeinOnline PDF indicates your acceptance of HeinOnline's Terms and Conditions of the license agreement available at https://heinonline.org/HOL/License -- The search text of this PDF is generated from uncorrected OCR text. -- To obtain permission to use this article beyond the scope of your HeinOnline license, please use: Copyright Information Use QR Code reader to send PDF to your smartphone or tablet device An Examination of Real Estate Purchase Options * Ronald Benton Brown TABLE OF CONTENTS I. INTRODUCTION: THE NATURE OF REAL ESTATE PURCHASE OPTIONS ........................... 147 II. CREATING A PURCHASE OPTION .................... 154 III. EXERCISING A PURCHASE OPTION ................... 160 IV. USES OF PURCHASE OPTIONS ....................... 165 A . In G eneral ............................... 165 B. Lease-Options .... ........ 168 C. Rights of First Refusal .................... 172 D. Convertible Mortgages ..................... 180 V. OTHER PROBLEMS ENCOUNTERED IN USING PURCHASE OPTIONS ............................ 187 A . Transfer ................................. 187 B. The Rules Against Perpetuities and Restraints on A lienation ............................. 192 C. Characterizationas a Mortgage ............. 197 D . Bankruptcy .............................. 199 E. Title Defects ............................. 201 F. Optionor's Waste ......................... 203 VI. OBSERVATIONS AND SUGGESTIONS .................. 206 I. Introduction: The Nature of Purchase Options A purchase option gives the optionee' the choice of whether or not * Professor of Law, Nova University Law Center, Fort Lauderdale, Florida. LL.M., 1976, Temple University; J.D., 1973, University of Connecticut; B.S.M.E., 1970, Northeastern University. The author would like to thank research fellow, Kenneth Mazlin, Nova Class of '88, for his valuable assistance in the preparation of this article. 1. The optionee is the one who receives the option, the choice. In a purchase option, the optionee has the choice of whether to buy or not. He is the prospective buyer. Colloquially, the optionee is said to "have an option" or to have "taken an op- tion" on the property. The optionor is the one who grants the option. In a purchase option, the optionor is the prospective seller. As this article considers only purchase Nova Law Review [Vol. 12 to purchase property at certain terms. This article will focus upon op- tions to purchase real property, examining their applications, their ben- efits and their limitations to gain an understanding of options in per- spective. Then the author will provide suggestions for the productive use of this device while eliminating the wasteful litigation which is pro- duced by the current state of the law. A purchase option is an offer to enter a particular contract to sell which has been made irrevocable. Two contracts are involved. The first, often referred to as an "option contract," 2 is a unilateral contracts which binds the offeror to hold open the offer to enter the second con- tract, a contract to sell the land. This type of purchase option should be distinguished from options created by will, testamentary options, which are governed by the law of wills rather than contract law." Traditional contract rules govern the option contracts.5 The op- options, that is the way in which the parties will be referred to throughout. Note, how- ever, that options may be used in various other ways. In other types of options the labels optionor and optionee may fall on the parties differently. For example, if the option gave the seller the choice of whether the buyer would be required to buy, i.e. a sale option, the seller would be the optionee. 2. RESTATEMENT (SECOND) OF CONTRACTS § 25 (1981) comment (a) states: "Option" A promise which constitutes an option contract may be con- tained in the offer itself, or it may be made separately in a collateral offer to keep the main offer open. Such promises are commonly called "op- tions." But the word "option" is also often used for any continuing offer, even though revocable, and indeed is sometimes used to refer to any power to make a choice. To avoid ambiguity the phrase 'option contract' is used in this Restatement. 3. State v. New Jersey Zinc Co., 40 N.J. 560, 576, 193 A.2d 244, 252 (1963). 4. A testamentary option is a term in a will which gives the beneficiary the right to purchase certain property at a specified price, or a price to be determined according to a method specified by the will. Testamentary options are used primarily by testators who are trying to equalize shares in their estates. This type of option resembles a right of first refusal because, like a right of first refusal, it does not ripen into an exercisable option until the occurrence of a condition precedent. A purchase option contract may be conditioned upon the death of a party, but a testamentary option is subject to a condition precedent that the testator will die without having revoked the will in which the option appears. The testamentary option is a right given to the beneficiary by the will, not by contract as are the purchases discussed in this article. See Annotation, Option Created By Will To Purchase Real Estate, 44 A.L.R.2d 1214 (1955); Annota- tion, Determination Of Price Under Testamentary Option To Buy Real Estate, 13 A.L.R.4th 947 (1982); Annotation, Time In Which Option Created By Will To Purchase Real Estate Is To Be Exercised, 82 A.L.R.3d 790 (1978). 5. Because of the local nature of real estate contracts, it is imperative that the law of the jurisdiction be carefully examined for local idiosyncracies. See, e.g., 1 FLOR- 1987] Real Estate Purchase Options tionor must receive consideration to make the option contract binding and the offer to enter the second contract irrevocable. The lack of es- sential terms would be fatal. However, it need not specify all the de- tails of the purchase contract. Some omissions may be filled in by a court assuming the parties intended to use reasonable terms.8 When exercised, an option to purchase real property will ripen into a contract for the purchase of real property. The Statute of Frauds provides that a contract for real property must be in writing and signed by the party to be charged. Some jurisdictions apply this writing re- quirement to purchase options.' However, an option is not technically a contract for an interest in real estate, but a contract to hold open an IDA REAL ESTATE TRANSACTIONS, Ch. 6B, Option Contracts. 6. See discussion of consideration infra in section V. 7. Essential terms would include the price, see Annotation, Requisite Definite- ness Of Price To Be Paid In Event Of Exercise Of Option For Purchase of Property, 2 A.L.R.3d 701 (1965) and Annotation, Specific Performance Of Contract Or Option As Affected By Unexecuted Provision For Determination Of Price By Arbitrators Or Ap- praisers, 167 A.L.R. 727 (1947); the time within which the performance must occur, see Annotation, Validity Of Option To Purchase Realty As Affected By Indefiniteness Of Term Provided For Exercise, 31 A.L.R.3d 522 (1970); and a description of the land, but a street address has been held sufficient. Park West Village, Inc. v. Avise, 714 P.2d 1137 (Utah 1986). 8. See, e.g., Detwiler v. Capone, 357 Pa. 495, 55 A.2d 380 (1947) (The court determined that, absent any specific terms to the contrary, an option in a lease could be exercised at any time during the term of the lease and that the kind of deed to be used, when and where the payment was to be made, and the purchase money mortgage terms were to be the usual reasonable forms and terms.) See Annotation, Validity Of Option To Purchase Realty As Affected By Indefiniteness Of Term Provided For Exercise, 31 A.L.R.3d 522 (1970). 9. See, e.g., Montanaro Bros. Builders, Inc. v. Snow, 190 Conn. 481, 460 A.2d 1297 (1983) (holding that Connecticut's Statute of Frauds does apply to options); Foy v. Foy, 484 So. 2d 439 (Ala. 1986) (holding that the failure to express a consideration would violate the Alabama Statute of Frauds). However, the courts seem willing to go to lengths to find the existence of a sufficient writing. See also, South Florida Citrus Land Co. v. Walden, 59 Fla. 606, 51 So. 554 (1910) (finding a writing sufficient that described the property "all of the land owned by said [defendant] located west and north of the South fork of the Miami river..."); Williams v. Williams, 347 N.W.2d 893 (S.D. 1984) (holding that the presence of the right of first refusal in a prior lease, the reference to it in an unexecuted memorandum of extension of the lease and in the lessor's listing agreement were sufficient); Baker v.