Not all real estate purchase contracts involve an immediate sale or transfer of ownership. An “option contract” can also be used to hold the property for a purchase within a specified time period.[i] Real Estate options, and the related option fee, come in a wide array of forms. You could be considering a right of first refusal, a put or lease option or the garden-variety real estate purchase option. This article discusses the fundamental legal impact of real estate option agreements.
- What is an option contract real estate?
An option agreement real estate is an irrevocable and continuous offer to sell for a specified period.[ii] The Optionee (potential purchaser) exercises its option when it articulates its intent and ability to perform before the option period expires.[iii] When the Optionee exercises, it forms a new and binding Real Estate Purchase Agreement, and she becomes the buyer. Put another way, there is first the Option Contract. After exercise, the parties are governed by a new contract—the Real Estate Purchase Agreement.
If the Optionee exercises, the Optionor (potential seller) must proceed to closing and sale of the property. An Optionor is found to repudiated (a.k.a. Anticipatory Breach),[iv] and be liable for damages or Specific Performance, when he communicates by words of acts to the other party that he does not intend to perform before the time for performance, and without qualification.[v] Repudiation is a breach of the contract, so the Optionee will have various remedies. This might include Specific Performance to transfer the property as required by the contract.
- How do I exercise my option contract?
The Optionee exercises its option and becomes the buyer, when it articulates its intent and ability to perform before the option period expires.[vi] Unless the Option Agreement specifically requires it, the Optionee does not need a binding financial commitment at the time they exercise the Option or at any time until closing.[vii] Minnesota Courts have declared this principle in diverse fact situations. Petition of Hilltop Development, N.W.2d 344, 347 (Minn. 1984) (Finding that letter from buyer saying its bank was “ready to proceed” effectively expressed ability); Minn. Stat. §§ 559.21 and 559.217; In re Estate of South, 1996 WL 438826 at *2 (Minn. Ct. App. 1996) (holding “even if the [buyer] was not financially able to buy at the time of the offer, it is irrelevant if the [seller] anticipatorily breached the purchase agreement”); Century 21-Birdsell Realty, Inc. v. Hiebel, 379 N.W.2d 201, 204 (Minn. App. 1985) (the sellers’ anticipatory breach “made it unnecessary for the buyers to pursue their FmHA application”).
- Can seller cancel purchase agreement?
When the Optionor exercises, a new Real Estate Purchase Agreement is formed. As with all Real Estate Purchase Agreements, the parties must follow very specific statutory procedures if they want to cancel the contract, even if the Seller is claiming that the Buyer failed to close on time. Hilltop, at 348; Minn. Stat. §§ 559.21-.217. Since Seller never cancelled the contract as required under Minn. Stat. §§ 559.21-.217, the sales contract was still valid. In Minnesota, the Buyer has a statutory right to cure whatever breach is alleged. As stated by the Minnesota Supreme Court, once the option was exercised, a new “contract of sale arose between the parties” and “[i]f [seller] then felt that [buyer] was in default, [seller] was required to comply with the statutory procedures governing the cancellation of such contracts.”[viii] This included the right for the Buyer to cure the default by making payment.
Real estate option contracts can be full of traps. If you are considering entering into or exercising a real estate purchase option, you should consult a lawyer in your area for the magic language you can use to ensure you get what you want.
Terrance W. Moore, a partner with the Hellmuth & Johnson law firm, is the “Bulldog Lawyer.” He has won multiple million-dollar settlements and verdicts for his clients in business divorce, fraud and other commercial disputes. He is the author of two books.
[i] This article is based on the law of Minnesota. Many of its concepts apply broadly across states. However, nothing in this article should be considered as legal advice for the reader’s particular situation. If you are considering taking action, you should consult an attorney. https://legal-info.lawyers.com/real-estate/residential-real-estate/option-contracts-for-buying-and-selling-real-estate.html
[ii] Nafstad v. Merchant, 228 N.W.2d 548, 550 (Minn. 1975) [iii] Petition of Hilltop Dev., 342 N.W.2d 344, 346 (Minn. 1984) [iv] https://www.revisor.mn.gov/statutes/cite/336.2-610 [v] 4 Minn. Prac. CIVJIG 20.46 [vi] Petition of Hilltop Dev., 342 N.W.2d 344, 346 (Minn. 1984) [vii] Id.; Minn. Stat. §§ 559.21 and 559.217; In re Estate of South, 1996 WL 438826 at *2 (Minn. Ct. App. 1996); Century 21-Birdsell Realty, Inc. v. Hiebel, 379 N.W.2d 201, 204 (Minn. App. 1985) [viii] Hilltop, 342 N.W.2d at 348; citing Minn. Stat. § 559.21
