Essential characteristics

For example, a buyer wants to purchase a property for $150,000, but needs to sell a boat to raise the down payment. The boat will take two or three months to sell. To accommodate the buyer, the seller offers the buyer an option to purchase the property at any time before midnight on the day that is ninety days from the date of signing the option. The buyer pays the seller $1,000 for the option. If buyer exercises the option, the seller will apply the $1,000 toward the earnest money deposit and subsequent down payment. If the optionee lets the option expire, the seller keeps the $1,000. Both parties agree to the arrangement by completing a sale contract as an addendum to the option, then executing the option agreement itself.

An option-to-buy places the optionee under no obligation to purchase the property. However, the seller must perform under the terms of the contract if the buyer exercises the option. An option is thus a unilateral agreement. Exercise of the option creates a bilateral sale contract where both parties are bound to perform. An unused option terminates at the expiration date.

An optionee can use an option to prevent the sale of a property to another party while seeking to raise funds for the purchase. A renter with a lease option-to-buy can accumulate down payment funds while paying rent to the landlord. For example, an owner may lease a condominium to a tenant with an option to buy. If the tenant takes the option, the landlord agrees to apply $100 of the monthly rent paid prior to the option date toward the purchase price. The tenant pays the landlord the nominal sum of $200 for the option.

Options can also facilitate commercial property acquisition. The option period gives a buyer time to investigate zoning, space planning, building permits, environmental impacts, and other feasibility issues prior to the purchase without losing the property to another party in the meantime.

Contract requirements              

To be valid and enforceable, an option-to-buy must:

  • include actual, non-refundable consideration

The option must require the optionee to pay a specific consideration that is separate from the purchase price. The consideration cannot be refunded if the option is not exercised. If the option is exercised, the consideration may be applied to the purchase price. If the option is a lease option, portions of the rent may qualify as separate consideration.

  • include price and terms of the sale

The price and terms of the potential transaction must be clearly expressed and cannot change over the option period. It is customary practice for the parties to complete and attach a sale contract to the option as satisfaction of this requirement.

  • have an expiration date

The option must automatically expire at the end of a specific period.

  • be in writing

Since a potential transfer of real estate is involved, Florida’s statute of frauds requires an option to be in writing.

  • include a legal description

  • meet general contract validity requirements

The basics include competent parties, the optionor’s promise to perform, and the optionor’s signature. Note that it is not necessary for the optionee to sign the option.

Common provisions  

Beyond the required elements, it is common for an option to include provisions covering:

  • how to deliver notice of election

A clause clarifies how to make the option election, exactly when the election must be completed, and any additional terms required such as an earnest money deposit.

  • forfeiture terms

A clause provides that the optionor is entitled to the consideration if the option term expires.

  • property and title condition warranties

The optionor warrants that the property will be maintained in a certain condition, and that title will be marketable and insurable.

  • how option consideration will be credited

A clause states how the optionor will apply the option consideration toward the purchase price.

Legal aspects              

Equitable interest. The optionee enjoys an equitable interest in the property because the option creates the right to obtain legal title. However, the option does not in itself convey an interest in real property, only a right to do something governed by contract law.

Recording. An option should be recorded, because the equitable interest it creates can affect the marketability of title.

Assignment. An option-to-buy is assignable unless the contract expressly prohibits assignment.