At times, transactions in real property are initially held through an option before signing a contract to buy or sale a property. An option refers to a contract where a property owner (optional) agrees with another individual (optional) that the latter will have the privilege to purchase the property within a given time at a stated amount or terms of conditions. The choice to buy the property is exclusively a decision to be made by the optionee. Options contracts can be used in many assets such as money, shares, and land (which is the most applicable in this case). Moreover, an option contract can exist in two primary forms, viz. call option or put option. Call option refers to a situation where the purchaser is granted a right to purchase land from the optionor, while put option is where the property owner has the right, but not a duty to sell his/her property to the optionee (Pivar and Bruss 143). In this case, the call option is applicable.
For an option to exist there should be a valuable, consideration, which can be given in the form of a fee. In this case, the valuable consideration is the $5,000 check that Mr. Smith gives Ms. Jones. The landowner has no certainty that the optionee will honor the option and buy the land. Nonetheless, whilst the option contract is valid, the landowner is prohibited from selling the land to a different client. This assertion justifies the need for the purchaser to give a consideration in return for the landowner to limit his/her freedom. However, this fee is irrecoverable. Hence, Mr. Smith cannot be given his check back whether he purchases the land or not. Moreover, option contract is a form oan f part performance. An offer becomes irreversible once performance has commenced. the
An option contract is often binding when made with consideration. The option holder promises to buy a piece of land within a given time while the landowner vows not to sell it within that time. This consideration caters for the promise provided by the landowner, and thus, it cannot be claimed whether the land is bought or not. In Rivers v Oak Lawn S.Co. 52 La. Ann. 762, the ruling held, “An option is not an actual or existing contract, but is a right reserved in a subsisting agreement. In a certain sense, an option is a mere pollicitation, a promise without mutuality, not yet ripened into a perfect agreement” (De Geest 239).
Having an option contract, the landowner does not sell the land, but rather he/she gives the privilege for the buyer to purchase it within the option period. This consideration compels the option giver (landowner) to sell the land within the given time and at the stated price. However, the option holder (purchaser) is not compelled to buy the land. In essence, an option contract is a type of unilateral contract (De Geest 239). In unilateral contracts, one of the parties takes responsibility in the contract. Ms. Jones has signed the option contract promising to sell her 2-acre commercial lot for $300,000 after being given a consideration fee, she has to sell the land to Mr. Smith, but this does not obligate Mr. Smith to purchase the land within the 90 days. The party that is justified to sue for breach of contract, in this case, is Mr. Smith if Ms. Jones sells the land to a third party within the option period.
An option contract is essentially a separate contract asking the offeror to keep the offer open for a particular period, thus prohibiting the offeror from selling to a third party (Jacobus 135). The offeror may choose to revoke the offer at any time if the option is not binding. Hence, if the option holder wants the offer to be binding, he/she has to provide a valuable consideration. This consideration creates a scenario where there is a promise for ant act. In this case, the valuable consideration is the $5,000 that Mr. Smith gave Ms. Jones. This amount is non-refundable even if the buyer purchases the land within the specified time. Hence, Mr. Smith will still pay $300,000 when purchasing the land within 90 days.
The fee is non-refundable on two facts, viz. option contract is a separate contract as explained in Warlow v Harrison, 1 E. & E. 316 and the fee is a consideration (Jacobus 135). A consideration is defined as something that can profit the individual giving a promise whilst a loss to the promisee. In Dunlop v Selfridge (1915), it was stated that in terms of a buyer and seller, the plaintiff should show that he or she purchased the promised land of the defendant by offering or doing something. It is a matter of give and take. Mr. Smith gave Ms. Jones $5000 in return to keep the offer of selling her an acre of plot open for 90 days. The option contract must be treated as a separate contract from the Real Estate Contract. The two are distinct. By refunding $5000, Ms. Jones will alter the first contract, viz. the option contract. The option contract is to keep the offer for the second contract open until when the Mr. Smith accepts the offer (Pivar and Bruss 142).
To protect his interest, Mr. Smith should work on a number of things whilst the offer is still open. He should strive to meet some of the conditions that were set for the option to be honored. For instance, the law provided that the option cannot be exercised unless the buyer has some documents necessary for the purchase of land, then Mr. Smith get the documents before the fixed time expires. Moreover, if he needs an assignee, then he should get the right person within the 90 days. An assignee refers to the third party that Mr. Smith would wish to give the right to exercise the option if he changes his desire to purchase the land. However, this aspect will depend on the provisions of the option contract, whether it permits an assignment or not. If the buyer is ready to purchase the land, he should inform the landowner in the most appropriate way like writing instead of other modes such as emails to avoid complexities where the notification is mailed when the option period exists, but the landowner receives the message when the option period has expired (Jacobus 133).
Furthermore, Mr. Smith can file a complaint with the relevant department, viz. the Title Office, on issues about the land within the remaining option period based on the principles of caveat. If the claim is valid, then Mr. Smith can be allowed to purchase the land even after the expiry of the option period once the issues are resolved. Nonetheless, the option to file to caveat will depend on the terms of the contract. If it prohibits a caveat, the option holder has to restrain from filing any complaints until the option is exercised. Notably, apart from getting the cash ready, Mr. Smith should be ready to complete the sale agreement.
The agreement must be in writing because the contract involves the sale of the property and in particular land. The contract has to be signed by Mr. Smith and Jones, and it should include all terms and conditions that the two have consented.
Consider the case of Ruddick v Ormston (2005), where the plaintiff handed out leaflets stating that he was willing to purchase properties without requesting for legal charges. Ormston came across these leaflets and thereon contacted Ruddick who agreed to purchase his flat at £25,000. They agreed to sign the contract within seven days. This agreement was noted down in the plaintiff’s diary, but they never agreed on the date to complete the transaction. They all signed the document. However, Ormston raised the value of his property to £55,000, which prompted the plaintiff to move to court demanding specific performance. The case was dismissed as the court held that the contract was invalid for it had not followed a due process (De Geest 238).
Therefore, parties to an option contract must fill option form, which spells out the terms and conditions. The document must mention the location and condition of the land and the time the offer remains open. Moreover, it should clearly state the purchase price and the terms under which it should be paid. Any miscellaneous terms can be incorporated at the end of the document before the parties sign the contract. The importance of written agreements over oral agreements is that they can be used as evidence in court when disputes arise. Nonetheless, there is no standard option contract form, and thus, the parties must be cautious to ensure that they draft a form that incorporates all their rights.
Works Cited
De Geest, Gerrit. Contract Law and Economics, Massachusetts: Edward Elgar Publishing, 2011. Print.
Jacobus, Charles. Real Estate Principles, Ohio: Cengage Learning, 2009. Print.
Pivar, William, and Robert Bruss. California Real Estate Law, California: Dearborn Real Estate Education, 2012. Print.