Options to Purchase: Minnesota Home Talk Legal Minute, May 24, 2014
After covering the basic legal principles behind real estate purchase agreements in the May 10 and May 17 Legal Minutes, this week I talked about a related subject; namely, real estate options.
An option is an offer by the seller which, for consideration, remains open for a specified time period. Womack v. Coleman, 92 Minn. 328, 100 N. W. 9 (1904); Vogt v. Ganlisle Holding Co., 217 Minn. 601, 15 N.W.2d 91 (1944). Until exercised it does not convey any interest in the land. It is only a personal right to accept an offer. M.L. Gordon Sash & Door Co. v. Mormann, 271 N.W.2d 436 (Minn. 1978). Once exercised, (i.e., the offer is accepted), it becomes a binding and enforceable purchase agreement. Therefore, all the terms which the parties desire to include in the purchase agreement should be included in the option. See, e.g. Malevieh v. Hakola, 278 N.W.2d 541 (Minn. 1979).
The obligation of the optionee to pay the stipulated purchase price in the event that the optionee elects to purchase the property is not a sufficient legal consideration for the option. Consideration for an option must be separate and distinct from the actual purchase consideration. Country Club Oil Co. v. Lee, 239 Minn. 148,58 N.W.2d 247 (1953). But option consideration money may be credited to the purchase price in the event that the option is exercised. Id.
An option is a valid contract if given for a valuable consideration. But it is only an offer if it is given without consideration. So in such situations it may be withdrawn at any time before acceptance. Morrison v. Johnson, 181 N.W. 945,148 Minn. 343 (1921).
An option agreement requires a duration. Without a stated term the period will extend for only a reasonable time. What is reasonable will be determined by the court on the basis of the amount of money the optionee paid for the option. Sone v. Harmon, 31 Minn. 512, 19 N.W. 88 (1884).
Options are usually assignable by the optionee, Womack v. Coleman, supra, subject to any restrictions in the option agreement.
Once an option has been exercised in accordance with its terms, it changes into a contract of purchase and sale and the relationship between the parties changes from optionor and optionee to vendor and vendee. Matter of City of Shakopee, 295 N.W.2d 495 (Minn. 1980). Because an option is a mere unilateral undertaking until exercised, it will lapse if the time within which it is to be exercised expires before its terms and conditions are met. Ferch v. Hiller, 295 N.W. 504,209 Minn. 124 (1941).
An election to exercise an option must be clear, unambiguous, and according to and in the manner prescribed in the terms of the option document. Bly v. Bublitz, 464 N.W.2d 531 (Minn. Ct. App. 1990) (a tender to exercise an option was ineffective where the sum necessary for tender included principal and interest but only principal was tendered); Brachmann v. Netzinger, 196 N.W.2d 616, 293 Minn. 405 (1972); Kastner v. Dalton Development, Inc., 122 N.W.2d 183,265 Minn. 511 (1963). Absent a contrary provision, a mailed acceptance of an option is not effective until received by the optionor. Salminen v. Frankson, infra.
The lapse of an option cuts off the optionee’s right to purchase. The optionee has no right to cure or revive it; and no termination notice is required. Romain v. Pebble Creek Partners, 310 N.W.2d 118 (1981); Salminen v. Frankson, 309 Minn. 438, 245 N.W.2d 839 (1976); Chapman v. Propp, 125 Minn. 447,147 N.W. 442 (1914). Additionally, an option may terminate by express agreement prior to the time when it would otherwise expire. Knaus Truck Lines v. Donaldson, 235 Minn. 453, 51 N.W.2d 99 (1952).
There is a fine line between option agreements and contingent purchase agreements, but there are significant differences. First and foremost, with a contingent purchase agreement the earnest money is typically refunded upon the non-satisfaction of a contingency. With an option, on the other hand, the consideration money is typically forfeited and retained by the optionor if the optionee does not effectively exercise the option.
Additionally, when it comes to terminating an option agreement vs. a purchase agreement, Minn. Stat. § 559.21 requires at least 30 days’ written notice to cancel a purchase agreement upon a buyer’s default, no notice is required with an option. The reason again is that an unexercised option does not give the optionee any interest in the real estate. Wurdemann v. Hjelm, 257 Minn. 450, 102 N.W.2d 811 (1960), cert. denied 364 U.S. 894,5 L.Ed.2d 187, 81 S.Ct. 222 (1960). Once the option is exercised, it becomes a binding purchase agreement and Minn. Stat. § 559.21 applies.
On occasion courts will interpret a purchase agreement subject to contingencies to be an option since the obligation of one party is not fixed. See, e.g. Liebsch v. Abbott, 265 Minn. 447, 122 N.W.2d 578 (1963). For example, a purchase agreement which is subject to a significant contingency, such as financing, may be deemed an option so a Minn. Stat. § 559.21 cancellation is not required. Romain v. Pebble Creek Partners, 310 N.W.2d 118 (1981). Conversely, a court might interpret an option agreement to be a purchase agreement subject to contingencies when equity so requires. See, e.g. Gordon Sash & Door Co. v. Mormann, supra.
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NOTE: this post contains excerpts from “Purchasing and Selling Real Property,” Real Property Law in Minnesota, Minnesota CLE (2008).