Friday, December 5, 2014

Beware Non-Enforceable Real Estate Options

Real estate options can be tricky, and it’s not uncommon for an organization to NOT have an option that they think they do. To be enforceable, an option must meet several criteria. If they don’t meet the criteria, they won’t hold up and the grantor will not be obligated to honor them. As examples, two of the key criteria for an option are that it must (1) clearly define what the option governs and (2) determine a price or an index-able mechanism for establishing a price at the time of option execution.

Justin Daniels, a real estate attorney I’ve found to be a very reliable resource, did a great job of illustrating a “gotcha” you might not know about with real estate options. It’s a real-world horror story of what can happen without professional representation, and it provides a free education to us all.

Here’s the story in Justin’s words:

“Blackberries, text messaging and instant messaging have resulted in a culture that worships speed at the expense of precision. I see this effect every day when people explain transactions to me that they wish to pursue, only to leave out important details that they either had not considered or had in their head and but did not include in the email.

“I recently encountered a court case that demonstrates this principle and its disastrous consequences. A landlord and tenant hastily entered into a lease where the tenant was leasing premises defined as approximately half the available office space. The parties further agreed that the tenant would have the right to purchase the property. In their haste, however, the parties failed to define what ‘property’ meant. Later, when the tenant exercised its right to purchase the property, the landlord refused to honor the option. The parties predictably ended up in litigation over the word property.

“After both parties expended significant sums in legal fees, the court of appeals determined that the lease defined the ‘premises’ but the option to purchase was for the ‘property.’ The term property, however, was not defined anywhere in the lease. The court concluded that the option failed and was not enforceable because it did not define the property subject to the purchase option.
If you’re interested to hear more about this particular case or need to find a knowledgeable real estate attorney, give me a call and I'm happy to connect you to Justin. He does a great job of keeping me current on the latest developments, enabling me to help clients avoid ugly surprises.

-John
404.547.2009