An option to purchase real estate is a contract in which an owner of real estate grants another person the right to buy the property at a specified price within a specified time. However, no obligation to purchase is imposed upon the person to whom the option is given.
An optionee is one to whom an option is given and an optionor is one who gives an option.
It is sometimes difficult to distinguish between an option and a contract of sale. If both parties are obligated to perform, then it is a contract of sale. If just one party is obligated to perform, then it is an option. An option is thus a unilateral contract in which the optionor/offeror agrees to make the offer irrevocable for a certain time in return for the optionee/offeree's performance of payment of the option money. When the optionee gives the appropriate notice of intent to exercise the option, the optionee accepts the offer and there is then a bilateral contract for sale with both parties bound to perform
The option to purchase may be created and contained in any of the following instruments:
- Distinct and specific instrument (Option in Gross)
Mortgage/Deed of Trust
Deed (Right of Repurchase)
Rule Against Perpetuities
The rule against perpetuities applies to options in
Bankruptcy Impact on an Option to Purchase
In certain cases, options to purchase, either
embodied in separate agreements or set forth in leases, are subject to rejection
and impairment under the provisions of Section 365 of the Bankruptcy Code.
Options to Purchase as Exceptions
Any option to purchase the property to be insured, either recorded or unrecorded, must be shown as a title exception in Schedule B of the commitment and in the title policy.
In certain situations, the deletion of the exception may present some difficulties. Under no circumstances should reliance be exclusively placed on the fact that the stated time for the exercise of the option has expired. If this is the case, and in order to avoid showing the exception, it will be necessary to ascertain that:
- The option has not been exercised.
- The option has not been extended or renewed.
- The optionee is not in possession of the property.
Insuring an Option
It is possible to insure an option in Texas. We require that the option be supported by consideration separate from the lease or other contract. However, prior approval must be obtained from the South West States Regional Underwriting Counsel or a Texas Underwriting Counsel.