What Exactly Is An Active Option Contract?
An Active Option Contract is first and foremost, a contract. It’s a written contract that allows the buyer to exercise the right to buy a certain property at a set price within a certain time frame for the real estate industry, or could also be an agreement where a large sum of money can be credited toward the purchase of a property at a set price within a certain time frame for the financial industry.
Essentially, active option contracts serve to grant the buyer with equitable interest in the property described in the contract, along with rights to ownership (buying or financing) subject to certain conditions (per the contract).
You may be wondering who uses Active Option Contracts, and for what purpose. In the real estate industry , those who use these contracts most often are investors. In the financial industry, it’s usually out of necessity. Active Option Contracts are used for assigning interest and wholesaling in real estate, grant agreements for rental properties (buying rental properties, owners finance agreements), private lending and essentially any situation where two parties have agreed to a deal with a larger sum of money upfront and may involve credit toward the purchase of a property at a set price within a certain time frame. In layman’s terms, it’s a contract for the sale of a piece of property (real estate or otherwise) where a portion of the funds given by the buyer is used to "purchase time" to the end of the agreement.
What Are The Parts of An Active Option Contract?
An active option contract has three essential components: the option period, the option fee amount and the conditions of such option. The contract must also identify the buyer and seller of each option contract.
Option Period
The option period is a defined period of time during which the option buyer has the right to exercise its right to purchase the underlying property. The option period for an active option contract and a passive option contract will typically be the same. An active option contract may truly be the only benefit conferred on the buyer of real property, but more commonly it is the commission paid for the buyer’s right to possess the land for the purpose of developing its specific project.
Option Fee Amount
The option fee amount is usually set at $10 to $100 even though any amount is permissible by law. The value of the option to acquire the property is the option fee amount in addition to the increase in value that would result from the use contemplated by the buyer within its defined option period. Since the purchaser of a passive option contract is not entitled to possession of the property, the actual monetary value can be negligible. The passive value of an active option contract should be commensurate with the other economic benefits being provided to the active option purchaser.
Conditions
The primary condition of an active option contract is the contingency that after the expiration of the option period the buyer will be obligated to close a sale of the property. The additional condition would be the presence of additional requirements under the active option contract itself. Typically the buyer and seller will agree to limit the manner in which the buyer may use the property within the option period.
Active Option Contracts And The Law
Active option contracts present a variety of legal ramifications for the parties for which they are agreed. The lessor is typically fully and contractually restricted from further dealing in the commodity subject to the leasehold. The leasehold may be subject to various covenants obligating the lessee to complete different uses of the leasehold (or requiring a minimum profit to be generated from the leasehold) under certain time frames. Conversely, the lessee is contractually bound to the continued payment of the agreed rental considerations and is thus also obligated to engage in various activities on the leasehold based on the terms of the leasehold. The primary rights of the lessor under a lease are discussed at length by Ely in his text, Royalty Payment Litigation in Oil & Gas Industry. These rights are trespass, quiet enjoyment, ingress/egress, specific performance, and remedies for breach. The right most implicated as a result of an active option contract is the right to quiet enjoyment.
The right to quiet enjoyment is a right that protects the lessee’s right to use the leasehold as agreed and free from disruption or reclamation by the lessor or any third party claiming under the lessor. Wright v. State, 136 Tex. 515, 151 S.W.2d 569 (Tex. 1941). Such disruptions may stem from the lessor’s own activities or the activities of the lessor’s agents or third parties claiming through the lessor. Texaco, Inc. v. Hashegger, 257 S.W.2d 157, 161 (Tex. 1953); Buzz Constr., Inc. v. Powell, 899 S.W.2d 781, 784 (Tex. App.-Houston [14th Dist.] 1995, writ denied) (holding that a lessor who seeks to claim its right to possession must afford its lessee the right to defend that possession). Similarly, a third party claiming under the lessor takes subject to these express and contractual rights. Therefore, it is necessary for the lessor to either retain some ability to control the actions of third parties claiming through the lessor or to claim those rights against the third party in order to protect its lessees’ rights. For example, Texas courts have held lessor liability for the actions of a third party claiming through the lessor when the actions undertaken by the third party were ultimately detrimental to the lessee. Beck v. Teco Palm Valley, LLC, 149 S.W.3d 349, 353 (Tex. App.-Amarillo 2004, no pet.); see also Elkhorn Ranch, L.P. v. BP Am. Pet. Co., 421 S.W.3d 889, 895 (Tex. App.-El Paso 2014, pet. filed) (finding that a lessor may be liable for trespass by a third party mining the minerals when the lessors’ actions were deemed to have "triggered" the trespass).
Unlike the right to quiet enjoyment, the right to specific performance does not arise from the acceptance of rent and therefore it is not subject to the same limitations. Any unilateral obligation arising from a conveyance from the lessor to a third party as it pertains to the obligations owed to the lessee is subject to specific performance in equity because the relief is fundamentally equitable. See Wright v. City of Kelley, 105 Tex. 314, 149 S.W. 1177, 1178 (Tex. 1911); Sons of Hermann Hall v. Collins Fish Co., 120 S.W.2d 533, 536 (Tex. Civ. App.-Dallas 1938, no writ); Eubank v. Hall, 7 Tex. 299 (1851).
Pros and Cons Of Active Option Contracts
For buyers of an active option contract, the advantage is that they can take advantage of changes in their field and in the world of business, often at the expense of the seller. They also have flexibility – the flexibility to sell the option at any time (as long as both parties agree) and the flexibility to create a brand new business if they decide to buy the property that they have an option on. The downside of an active option is that it also puts a time limit on the deal. The buyer must be ready to go right away. If they cannot afford the property or do not wish to buy it, they usually do not have time to look for a third-party buyer. This can lead to a problem if the buyer was simply a placeholder for a third party, since that third party now has the deadline put on it of 60 days. It’s much the same for the seller of an active option contract. From a purely financial perspective, the money upfront isn’t that much, usually, given that they will be missing out on future revenue through an early buyout. They may even have a proposed contract for the sale of the property in hand (hence the active option contract) so they’ll be out the cost of that deal and will have lost the gain it would have brought. However, the benefits of these deals come just as their purchase price is around the corner and they’re getting desperate for cash. An active option gives them some breathing room and rearranges their finances, even in the short term.
Active Option Contracts In Real Estate
Active option contracts are commonly used in the real estate industry to facilitate the buying and selling of residential properties. Individuals looking to sell their homes may encounter active option contracts that prospective buyers submit along with an offer. Active option contracts in the real estate realm typically grant a potential purchaser rights to a property without them making a total commitment to buy.
Active option contracts in real estate are generally structured to give an individual the right to make the first bid on a home up until a certain amount of time has passed. An example of how such a provision may be structured is as follows: "Buyer has the right to meet or exceed any offer to purchase the property up until August 1st , 2023, after which offer will automatically terminate." Whether in their role as buyers or sellers, individuals frequently engage the services of real estate agents to assist with the negotiation of an offer. Active option contracts are a common feature included in offers for the purchase of a home.
How To Use An Active Option Contract
In order to effectively execute an active option contract, you must first ensure that you have an offer to lease that is signed by the landowner and the operator. If the option is for a non-competitive lease, the landowner may have already signed the lease and attached it to the offer. However, if the option is for a competitive lease, the landowner has probably only signed the offer attached to the competitive lease (which is a form prepared by the Bureau of Ocean Energy Management and also known as BOEM Form 14). Once the offer to lease is perfected by the signature of the landowner, the operator will submit the offer to BOEM for acceptance. BOEM will pay the landowner one-fifth of the bonus payment set forth in the offer with the offer. Additionally, BOEM, through its auditors, will verify that the offer and the package provided by the operator and landowner conform with federal law and regulations.
The offer must remain an active option contract until BOEM accepts the offer – which can take several months. During this time, the landowner should consider doing the following:
Active Option Contract Myths
As is sometimes the case with new developments and terminology, active option contracts have been a source of some controversy due to misunderstandings. One such misconception is that if an owner elects to record the active option contract during its term, they are giving up their rights under the lease package for the old well. That is simply untrue. Nothing in the lease package is impacted by the active option contract if the owner elects to record the active option contract. The provisions of an old lease do not change, either in reference to a previous well or any possible future deep rights, just because an active option contract is recorded . The only thing that the owner is getting from the operator in exchange for being a party to the active option contract is the right to participate in a recompletion operation that might affect some lessor’s interest in a new deep well. And that must be exercised on a well by well basis. If there are two different recompletion wells, the operator must give the owners the opportunity to participate on each of them individually. They must also tell the owners in which way the well(s) is going to be completed. If the word "deep" is used, then it’s a deep completion, and the old package is not disturbed one iota under the terms of the old lease package.