Options in California Real Estate Contract Transactions

 

People ask us about possible lease option agreements to sell and buy properties at Orange County, CA.

California real estate contracts sometimes have OPTIONS granted to lessees and proposed buyers.

A rent-to-own or "LEASE OPTION contract" usually contains an OPTION TO PURCHASE clause. 

Sometimes developers get separate OPTIONS TO PURCHASE on bare land so they can buy and develop at some time in the future.  Adjacent property owners sometimes get a PURCHASE OPTION contract to secure future of neighboring property.

Question is whether any such OPTION TO PURCHASE might be something else - such as a "RIGHT OF FIRST REFUSAL" - where the buyer/optionee gets a right to buy at unknown price to be offered by another party at some time in the future.  

A purchase offer to sell property on certain terms can usually be revoked by the owner/offeror any time before it is accepted.  

 

However, if the offeror/seller and offeree/buyer enter an agreement with "independent consideration" delivered to seller, that requires the offer to remain open and irrevocable for a period of time - that's an OPTION TO PURCHASE.

An optionor/seller cannot revoke such OPTION TO PURCHASE if it was granted to optionee/buyer with "independent consideration".  

"Independent consideration" means that there must be actual payment or delivery of consideration of some kind (money, motor vehicle, jewelry, etc.) - which needs to be separate and distinct from the payment for the purchase of the property if the option was exercised.

If the option is contained in a lease - LEASE OPTION TO BUY - written and agreed upon provisions of the lease, including the rent to be paid, can be sufficient consideration for the option.

 

If there is no separate CONSIDERATION actually received by the optionor/seller, that option would remain revocable by seller/optionor.  However, if the option is exercised by buyer before it is revoked, the seller/optionor becomes bound under the contract even if there was no consideration.

The option agreement must contain essential material terms of the purchase and sale - identities of the buyer and seller, identity of the property, and the purchase price.

How such OPTION TO PURCHASE is exercised in California

"EXERCISE" of the option is usually by the buyer/optionee - and that would be optionee/buyer's acceptance of the offer to sell the property.

The option agreement can specify how the option is to be exercised - examples are "NOTICE OF EXERCISED OPTION" delivered by hand to the owner/optionor, or by fax, or by confirmed receipt email, or by messenger.  If the method is specified in the original option agreement, that must be followed exactly.  If no method is specified, the option can be exercised in any reasonable way that gives the seller/optionor notice that the buyer/optionee is accepting the offer and ready to perform.

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This is for information only and not the providing of legal or tax services.  Be very careful with options in California real estate purchase or lease contract.  If you are a buyer or seller of real estate and getting an agreement with an option, you should consult with an attorney in your state and area and make sure you get that right according to law. 

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