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WHAT IS IT? An option to purchase is a contract between a landowner and someone who is interested in purchasing or intends to buy a parcel of land, under which the Option Holder 129 pays the landowner a sum of money 130 in return for the right to purchase the property. 131 It is an offer by the owner to sell, coupled with a promise not to withdraw the offer during the period of the option. 132 Such a contract creates an interest in the landowner's land in favour of the Option Holder and can be registered in the land title office against the title to the land. It ensures, as its name implies, that the Option Holder will have the option to purchase 133 the land.
POSSIBLE APPLICATIONS. An option to purchase is not a stand-alone tool in the protection of private property. It is an intermediate step before the property is purchased.
An option to purchase is most useful when a conservation organization knows that it wants to buy a particular piece of land and the landowner knows he or she wants to sell it, but the conservation organization does not have all of the necessary capital to complete the purchase. By buying an option to purchase the conservation organization buys itself time to see if it can raise the necessary funds, while limiting its own risk to the price of the option to purchase.
An option to purchase could also be used by a conservation organization that is still deciding whether to purchase a particular parcel of land. For instance, if the group is interested in purchasing a particular property only if another property is also available for purchase, it could use an option to purchase for one parcel while negotiating about the purchase of the other.
LEGAL BASIS. An option to purchase is a contract which creates an interest in land in favour of the Option Holder and can be registered against the title of the landowner. In buying an option to purchase land, the Option Holder is not paying for the land but is buying the right to purchase the land. The purchase price for the land is separate from the price of the option to purchase, although the parties may negotiate a purchase price which takes all or some part of the price of the option to purchase into account.
An option to purchase may either specify the purchase price of the land itself or set out a mechanism for determination of the purchase price.
The landowner's ownership rights to use the land are unaffected by an option to purchase. However, the right to dispose of the property, or an interest in the property, is curtailed. Because the landowner has given the Option Holder a right with respect to all the property, the landowner cannot dispose of part of the property without giving the Option Holder the right to exercise the option to purchase according to the terms of the document. 134
When the Option Holder exercises the option to purchase, it is converted into a contract for the sale of the land.
HOW IS IT CREATED? An option to purchase is created by a written contract between the landowner and the Option Holder, setting out the description of land, the amount payable by the Option Holder for the option, the duration of the option, conditions under which the option may be exercised, and how the option terminates. The option to purchase is then registered in the land title office so that any other inquiring purchaser will see that the Option Holder has an option to purchase.
HOW LONG CAN IT LAST? Since an option to purchase creates an interest in land, it is subject to the rule against perpetuities. 135
WHO MONITORS AND MAINTAINS THE LAND? The landowner retains all of the ownership rights as to use of the land. Therefore, it is up to the landowner how and whether the owner manages the land for conservation purposes.
HOW CAN THE LAND BE PROTECTED OVER TIME? An option to purchase is not a legal tool which a conservation organization normally will use in any immediate way to conserve the land. However, it is a useful tool where the conservation organization wants to guarantee its right to purchase the land.
HOW IS IT TERMINATED? An option to purchase ends
if the landowner has reserved a unilateral right to terminate the option, when the landowner terminates it.
129. We will refer to someone who is taking an option to purchase as the Option Holder.
130. Either the Option Holder must pay some consideration (money or money's worth) under the contract, or the contract must be under seal. This is a rule of contract law.
131. In legal terminology the landowner who grants the option to purchase is called the optionor and the person who takes the option is called the optionee. But for simplicity we will refer to these parties as the landowner and the Option Holder.
132. Anger and Honsberger, above at footnote 44, at 1157.
133. "An option is a right acquired ex contractu to accept or reject a present offer within a limited, or, as the case may be, a reasonable time in the future, and, when otherwise validly constituted, vests in the optionee an interest in land, i.e. forthwith upon the granting of the option, the optionee, upon the occurrence of certain events solely within his control, can compel a conveyance of the land to him. However, this interest is contingent upon the optionee's election to exercise the option." See Di Castri, above at footnote 44, at 6-1, paragraph 211.
134. The owner can get a mortgage on the land, however. Section 25 of the Property Law Act provides that unless there is a contrary intention in the document, the landowner is free to mortgage the land notwithstanding the registration of an option to purchase.
135. The Perpetuity Act, section 18. Also, as one author states: "Generally, the existing perpetuity statutes ... provide that if an option is exercisable for more than a stated period (21 years, 80 years) it is void after the expiry of that period. An option for a period longer than that prescribed is not void ab initio, the length of time within which it may be exercised merely being reduced. If the option is not exercised within the prescribed period it ceases to be enforceable even between the original contracting parties. The rule does not operate in the sphere of options to purchase the fee simple where the optionor retains an untrammeled right, at his pleasure or after a stated period not in excess of that allowed by the rule, to terminate the option and thus regain the absolute power of alienation incidental to his estate in fee simple." Di Castri, above at footnote 44, at 6-5, paragraph 212. For a discussion of the operation of the rule against perpetuities, see Chapter 5, Everything You Always Wanted to Know about Land ...
136. The cost of an option may not be small, but is usually small in relation to the purchase price.
