Real Estate Alphabet Soup: O is for Option

Miles & Stockbridge P.C.

In my last post, “Real Estate Alphabet Soup: N is for Notice” I continued my primer on the “alphabet soup” of real estate. This post continues to stir the “alphabet soup” with the letter “O.”

O is for “Option”. In both the sale and leasing of real estate there may be an “option” involved.

An “option” contract is a binding agreement or contract between the parties in which the property owner agrees that a party shall have the privilege to purchase the property at a fixed or determined purchase price within a fixed or stated period of time. The owner’s or “offeror’s” acceptance from the offeree of some consideration or payment in exchange for his or her promise to keep the offer open for a certain designated period of time makes it a binding agreement. The consideration or payment may later be applied as a deposit or down payment on the purchase price for the property if the purchase option is ultimately exercised by the offeree. And the offeree must have the exclusive right to make the decision whether to exercise the “option” without requiring some further consent of the owner/offeror. Otherwise, it is not truly an “option” contract.

Options may also be contained in lease agreements. A lease may contain a renewal “option” for the tenant or lessee to renew the lease for an additional lease term or multiple option terms. A lease may also contain a purchase “option” for the tenant or lessee to purchase the leased property at some later time during or at the end of the lease term. The option to purchase will generally provide either a fixed determined purchase price, or some method to determine the purchase price at the time the purchase option is actually exercised, for example, by an appraisal to determine the fair market value of the property at the time the option is exercised. In the case of both a renewal option and a purchase option, there is generally a requirement for the party having the option to provide written notice to the owner within a specific period of time of his or her intent to exercise the option in order to preserve his or her rights to the option. And if there are any additional conditions precedent which must be satisfied in order to exercise the option, the party exercising the option must also provide confirmation that any such conditions have been fully satisfied.

Real estate comes in all sizes, shapes and styles. But in addition to having many “options” of locations and types of property to purchase or lease, there are also “options” for how to do so.

In my next post, I will move on to the letter “P”, the next letter in this real estate “alphabet soup.”

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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