Assignment of Option to Buy — RPI Form 161-2

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This form is used by a tenant’s or buyer’s agent or an escrow officer when the holder of an option to purchase property has sold the option rights, to transfer the ownership of the option to the person acquiring the purchase rights.

Your use of RPI Form 161-2

An option to buy granted to a tenant

A landlord grants a tenant an option to purchase by entering into an irrevocable right to buy the property, called an option to buy.

The option to buy is typically evidenced by a separate agreement attached to the lease agreement. An option to buy includes the terms of purchase, none of which are related to the leasehold estate the tenant holds in the property. The option to buy is always referenced in the lease agreement and attached as an addendum. [See RPI e-book Real Estate Property Management, Chapter 6]

An option to buy contains all terms needed to form an enforceable purchase agreement for the acquisition of the real estate when the buyer exercises the option. [See RPI Form 161]

The tenant holding an option to buy has the discretionary right to buy or not to buy on the sales terms stated in the option. To exercise the option, the tenant does so within an agreed-to time period. No variations are allowed for enforcement.

Thus, the option is a purchase agreement offer irrevocably agreed to by the owner to sell, but the tenant has not agreed to buy. To agree to buy the property under an option, the tenant exercises their right to buy through an acceptance of the irrevocable offer to sell granted by the option.

The option agreement

Under an option to buy agreement, the tenant is not obligated to buy the leased property. The tenant is merely given the right to buy by a later timing exercise of the option. This is a type of call option. [See RPI Form 161]

For the option to be enforceable, the purchase price of the property and terms of payment on exercise of the option are included in the option agreement. The consideration given the owner by the tenant for the grant of the option is the tenant’s execution of the lease agreement. Option money is not also needed. [See RPI Form 161 §9]

When the dollar amount of the price is not set as a specific dollar amount in the option agreement, the purchase price may be stated as the fair market value (FMV) of the property at the time the option is exercised.

The right to buy is exercised by the tenant within a specified time period, called the option period. The option period typically runs until the lease expires or is terminated, including extensions/renewals. [See RPI Form 161 §4]

When the option is not exercised precisely as agreed during the option period, the option period expires of its own accord — no further notice or documentation is needed.

On expiration of the option, the option no longer exists, and the tenant is without an enforceable right to acquire the property. [Bekins Moving & Storage Co. v. Prudential Insurance Company of America (1985) 176 CA3d 245]

When options to renew or extend leasing periods are negotiated as part of the leasing arrangements, the expiration of the option to buy is tied by agreement to either:

the expiration of the initial lease term; or
the expiration of any renewal, extension or continuation of the tenant’s lawful possession.

A right of first refusal differs from an option to buy

A right of first refusal is a contractual pre-emptive right held by a person to buy a property in the event the owner later decides to sell it.

The right of first refusal is often confused with an option to buy as they share similar characteristics.

Recall that an option to buy is an irrevocable right held by a person, typically a tenant, to purchase a property for an agreed-to price during a specified period of time.

In contrast, a right of first refusal, though similar, refers to an opportunity held by person, often a tenant, to purchase the property in the event the owner, such as the landlord, decides to sell it prior to the right expiring.

Further, when a third party offers to buy the property and the owner agrees to sell, a right of first refusal also provides the person holding the preemptive right with the ability to purchase the property on the same price and terms offered by the third party and accepted by the owner.

The right of first refusal is a short agreement with its provisions either included in the body of the lease agreement or by an addendum. Unlike the option to buy, the right of first refusal rarely contains any terms of a sale and does not need to for enforcement. [See RPI Form 579]

Breaking down the assignment of option to buy

Agents and escrow officers handling the sale of an option to buy property, typically held by a tenant or a prospective buyer as the Optionee, use the Assignment of Option to Buy published by RPI to transfer the option rights when the Optionee sells their right to buy the property interest described in the option to another person, called the assignee who is acquiring the option rights.

The assignment form identifies the option to buy document by its date, the optionor who owns the property and granted the option, the optionee now selling their option rights to buy the property, the description of the property under option and any recording information related to the option to buy.

The form also identifies the participants to the assignment of the option as the Optionee assigning their rights to buy, and the Assignee who is acquiring the option rights to buy the property. [See RPI Form 161-2]

The Assignment of Option to Buy contains the following sections:

Facts: the date of the option to buy, the Optionor who owns the property which is the subject of the option, Optionee who originally acquired the option rights, and a description of the property and any recording information [See RPI Form 161-2 §1];
Agreement: the Optionee assigns their rights under the option to the Assignee acquiring the rights who agrees to perform all of the Optionee’s obligations under the option to buy [See RPI Form 161-2 §§2 and 3]; and
Signatures of the seller and buyer. [See RPI Form 161-2]