Exercising a Purchase Option - Close Only Counts With Hand Grenades

Here is a scenario: An investor enters into a lease/option with a seller which includes certain terms of the purchase in the option agreement (purchase price, for example). When the time comes to exercise the option, the investor adds or amends terms of the purchase in the purchase contract and submits it to the seller. The seller ignores the exercise of the option because he or she does not agree with the terms. The option term expires and the inevitable fight ensues, whereupon the investor learns that her rights to buy are not as strong as what she once thought.

The Problem

There are 2 issues described above. The first is called “exact matching.” Each State’s law controls whether there is a duty to make the option match the purchase contract. In my home State, Maryland, our highest court recently ruled in a case that there is generally an “exact matching” obligation imposed on the buyer. The buyer lost that case because he made unilateral changes in the purchase terms while trying to exercise his option.

The second issue surrounds the “duty to inform.” In other words, does the seller have to tell you that you bungled the exercise of your option? In that same Maryland case, the Court stated that the seller has no obligation to inform the buyer of mistakes. The seller was found not to have acted in bad faith by remaining silent as to buyer’s failure to properly exercise the buy option.

The Solution

Your State law may or may not be as strict, but if you attempt to change the contract at the time you exercise your option, you are tempting fate. Follow these rules if you want to save yourself a lot of heartache later:

RULE #1: DO NOT INCLUDE PURCHASE TERMS IN YOUR OPTION AGREEMENT

Rather than addressing the actual purchase terms in the option, include a clause similar to this:

“Grant of Option: The Seller offers to sell and convey to the Buyer and hereby grants to the Buyer the exclusive and irrevocable option to purchase the Property, together with the improvements thereon, and all the rights, ways, alleys, privileges, and appurtenances belonging or in anywise appertaining thereto, more particularly described in, and subject to the terms and conditions set forth below and in the form of Contract of Sale which is attached as a part of this Agreement and is designated as EXHIBIT A (the “Contract of Sale”).”

Of course, you must then attach a properly formatted and unexecuted copy of an agreed-upon purchase contract that contains all the relevant terms of your purchase transaction. When the time comes for exercising your option, you need only execute the pre-agreed-upon contract and go to closing.

Following this rule will mitigate, if not completely destroy, any arguments the seller may try to raise later regarding the exact matching issue.

RULE #2: EXERCISE YOUR OPTION EXACTLY AS DESCRIBED IN THE OPTION AGREEMENT

Don’t “freelance” the exercise of your option. If your option agreement states that you must stand on your head and spit nickels while delivering the option to the seller, DO IT. A sure way to lose in court is to not comply with the agreed-upon method of exercising your option.

RULE #3: DON’T TRY TO CHANGE THE PURCHASE CONTRACT

Any attempt to unilaterally change the purchase terms will jeopardize your ability to enforce your option or contract. Do not try to change any of the following without prior written agreement from the seller:

• The deposit amount or who holds it;
• The purchase price;
• The property description;
• Any other “material” term of the contract (each state law will define what a “material” term is);

If you follow these rules, it will help keep your transaction from exploding in your face, but remember that these tips are no substitute of competent legal advice. Seek proper advice from your local real estate attorney.

Good luck and happy investing!

Jeffrey Shiller is a Maryland based attorney specializing in real estate. He is a principal of Jeffrey P. Shiller, P.A. and Hard Money Bankers, LLC. His real estate services include contracts, settlements, loan document production, pre-foreclosure consultation, and structuring creative real estate transactions and hard money deals.

On the web at: http://www.viprealestatelaw.com or http://www.hardmoneybankers.com