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Real Estate

REAL ESTATE OPTIONS: Is an Option to purchase property marketable on the MLS?

An Option to purchase luxurious real estate is a contract between two parties giving the purchaser the exclusive right (without the obligation) to buy the property. During the term of the option no-one else can buy or sell the property including the owner. For accepting this obligation the seller received and keeps an option fee whether the option is exercised or not. The option holder (buyer) may then either exercise his or her right under the contract by completing the property purchase. Alternatively the option holder may sell their right (the option) to purchase the property to someone else. If the option holder exercises his or her right under the contract, the seller is obliged to complete the sale under the predetermined conditions. An option represents an equitable interest in the property and is often used to gain control over a property without paying the full price. We would highly recommend speaking to a real estate attorney such as Real Estate Lawyer Chiang Mai to find out more.

Having an Option to purchase Real Estate should be formulated in writing. Today, Real Estate Agents and Brokers are formulating such Options as schedules to Agreements of Purchase and Sale, and as schedules to Agreements to Lease, using the standard Provincial Real Estate Association forms. The form title to the main agreement is irrelevant, what is important is the true intentions of the parties negotiating at the time the agreement was entered into. The subject property could have been originally listed for sale or lease, the listing agents must understand the needs of their client and the potential buyer of the Option. It is very important that the Real Estate Agent make sure that if they are preparing an offer of an Option to purchase Real Estate that they address the terms of the Option in a way that makes sense with the main form of agreement used (i.e. Agreement of Purchase and Sale or Agreement to Lease), and is not too broadly worded so as to leave room for interpretation. Furthermore, it would be wise to address all the same terms and conditions you would normally negotiate in a straight offer of an Agreement of Purchase and Sale, such as a financing clause, deposit, having a Maryland home inspection carried out to make sure that the house in the right condition, etc… to kick in once the Option is exercised.

For example, when using an Agreement to Lease with an Option to purchase it is vital that some kind of differentiation is made between a Right of First Refusal and a true Option to purchase the subject property in the Agreement to Lease. The reason is that one can easily argue that the intentions of the seller was to provide a right of first refusal as oppose to an option to purchase because they can be confused by the ordinary everyday seller of real estate. However, they mean vastly different rights to the other party, the Option holder/purchaser. For instance, a right of first refusal means that the seller of the subject party can first obtain an arm’s length third party offer to purchase the subject party and then approach the other party with the right of first refusal to see if they will match it and purchase the property on the same terms, conditions and price. Obviously, this is favorable to the seller when the fair market value of the subject property has increased since the date the parties entered into their Agreement to Lease with the right of first refusal. However, in a true Option to purchase, the price to be paid for the subject property would have already been set as the exercise price, the length of time the Option holder has to exercise that right would have been set as the term, the fact that the Option holder can either exercise at any time up to the close of the term or only on the last day of the term would have been addressed, and finally a separate form of consideration or price for this Option would have been negotiated or stipulated at the time this agreement was executed and exchanged at the same time or during the lifetime of the term of the Option (such as in the rental amount). That being said, even with rising market values, the seller cannot ask for a higher price than what was previously agreed to as the exercise price. And more so, addressing that the Option to purchase is a true option and not a right of first refusal in the main agreement would help ensure that the seller cannot argue the contrary in that at the time of the negotiations he or she intended for the option to in-fact be a right of first refusal in the Agreement to Lease.

Every Option carries with it the right under law to be transferable just like every other security or financial instrument; so long if there is nothing to the effect that the said Option cannot be transferred in the Option agreement. Similar to purchasing shares in a housing cooperative or co-ownership housing complex, the owners are essentially purchasing securities (i.e. financial instruments) in the form of shares, just like a purchaser of an Option is also purchasing securities (i.e. financial instruments).

Under law a housing cooperative is a legal entity—usually a corporation—that owns real estate, consisting of one or more residential buildings. Each shareholder in the legal entity is granted the right to occupy one housing unit, sometimes subject to an occupancy agreement, which is similar to a lease. A shareholder in a co-op does not own real estate, but a share of the legal entity that does own real estate. Each resident or resident household has membership in the co-operative association. Members have occupancy rights to a specific suite within the housing co-operative as outlined in their “occupancy agreement”, or “proprietary lease” which is essentially a lease. Without any restrictions or clauses to the contrary, an Agreement to Lease with an Option to purchase the subject property in the agreement, is essentially an Option to purchase with an occupancy agreement similar to the arrangements we find today in cooperative housing. Finally, cooperative housing shares are routinely listed on the MLS in accordance with the Real Estate Board’s By-Laws, Rules and Policies specifically. Shareholders owning these financial instruments or securities in the legal entities known as housing cooperatives are listing their securities for sale on the MLS by way of their Real Estate Agents and Brokers, all in compliance with the said Rules. Obviously, statements to indicate that it is the Option to purchase that is being sold/transfered should always be included directly on the MLS listing after consulting with the representatives of the Real Estate Board; so as to ascertain how they would like you to accurately provide the requisite information on the listing.

An Option to purchase Real Estate is a contingent claim against the main security, in this case the right to own or obtain title to the actual Real Estate property. Hence under law pursuant to section 22(8) of the Registry Act, the owner of the Option is entitled to assign and register his or her interest in the property on title. Any registered interest in the title of the property should be allowed to be listed on MLS for sale or transfer. For example, these interests include leases to seek a sub-lease and Options to purchase.

Finally MLS (Multiple Listing Service) Rule 306 specifically stipulates that:

“A Member submitting an MLS Listing … represents and warrants to [Local]REB [Real Estate Board] that the Member had been so authorized by the person legally entitled to sell the property…”

What is most striking in this rule is the use of the words “legally entitled to sell the property”. By legal definition, and without any further details or explicit terms to the contrary, anyone legally entitled has a right under law in one form or another, either recognized under statute (substantial law), common law (case law), or equity. Hence, rights obtained by way of a contract would provide for legal entitlements; so long as the contract is enforceable and legal. An Option agreement, or an Option contained in a main agreement to lease or of purchase and sale, is in fact an enforceable contract under law. It has the requisite offer and acceptance, consideration/price, terms, and the clear intentions of both parties to be binding, furthermore it complies with the Statute of Frauds requiring that all agreements pertaining to real estate property be done so in writing in the form of a contract. Hence, this legal entitlement is simply various property rights; such as rights to possession of the property, rights to exclusive use of the property, rights to maintain and utilize the property, rights to purchase the property, etc…, all together making up the nature of the estate he or she has in that property. All these rights can be ascertained with certainty since the said agreement should always provide for who in fact has those rights, the duration of the rights and the consideration/price for those rights.

Property law in Canada recognizes that the type of estate in real property is a representation of the bundle of rights to that property; and without negative covenants/promises restricting the rights to transfer one’s estate, everyone is entitled to alienate/transfer/sell their bundle of rights or any part thereto (i.e. their estate). Therefore, an Option to purchase real estate alone or together with an agreement that provides for occupancy and possession of the property, such as an agreement to lease, dictates the total bundle of rights, or his or her estate in the said property. In property law, to have rights to property (such as to own entirely, lease, etc…) means to have an estate in the property. And just like any Option, Share or other Asset, they are all considered a form of property under law. The above Rule 306 does not illustrate, define or explicitly mention the form or types of property, nor does it disinclude financial instruments or securities such as Shares or Options. Therefore, as per any Option contract under law, the owner of that Option is legally entitled to sell the property, for which the property here is defined as the Option to purchase the underlying/contingent real estate property. And as per Canadian property law, and as a corollary, he or she has the legal entitlement to sell his or her estate in the property as well; his or her estate being the bundle of rights that includes the right to purchase the underlying real estate property.

Options to purchase real estate should be available to list for sale on the MLS, subject to any restrictions in the actual agreement or agreements making up the Option. Contact the lawyers at Levy Zavet PC to access our expertise available to you as a Seller, Buyer, Real Estate Agent or Real Estate Broker.