Options to Purchase Real Estate

Fact Scenario I

Meriden entered into an with JJJ Realty, Inc. to lease an office building located just off a main highway. The property was very desirable because of its location. The lease agreement provided that Meriden would lease the property for a period of five years at a specified rental. At the end of five years, the lease agreement gave Meriden the option to buy the property at its fair market value.

Fact Scenario II

Jason was interested in buying a particular condominium. The real estate market in the area where the condominium was located was overly "hot"; indeed, it was a seller's market. Jason felt as though he needed some time to investigate certain zoning issues in the neighborhood surrounding the condominium. He couldn't find the answers he needed quickly and didn't want to lose out on the opportunity to buy the condominium. Jason negotiated an option with the seller of the condominium. The option agreement allowed Jason a period of 30 days to investigate the zoning issues. During the option period, the seller agreed not to sell the condominium to any other party. Jason agreed to pay the seller $2,500 for the option. Jason and the seller agreed that, if Jason went ahead with the purchase, the $2,500 would apply toward the purchase price of the condominium. If, however, Jason decided not to purchase the condominium, he agreed to forfeit the $2,500 in favor of the seller.

In real estate transactions, buyers and sellers often discuss options. An option may arise standing alone or as part of a lease agreement, as described more fully in the fact scenarios set forth above. Briefly stated, an option refers to a party's right to purchase real estate within a specified period of time.

Landlord/Tenant vs. Buyer/Seller

As between a landlord and a tenant, an option to purchase may be either absolute or conditional. In the case of an absolute option, the tenant has the right to exercise the right to purchase the property at a specified time, based on set terms. A conditional option differs in that the tenant's rights accrue only in the event the landlord wants to sell the property at a particular time.

As between a buyer and a seller, an option can be on whatever terms are agreeable to the parties. Generally speaking, an option agreement between a buyer and seller usually provides for some period of time during which the seller agrees not to sell the property to any other party. Under such circumstances, the buyer has the option to purchase the property during the specified period of time on the terms that have been agreed upon by the parties.

In either case, an option agreement provides both parties to the agreement with some certainty as to the disposition of real estate.

Copyright 2011 LexisNexis, a division of Reed Elsevier Inc.