Option to Purchase: 6 Things to Know Before Exercising It

Are you in the market to buy a completed private residential property? (i.e. property that is completed/developed).

Then one of the stages to purchasing such a property in Singapore involves exercising an Option to Purchase.

An Option to Purchase is exercised when a buyer decides that he wishes to purchase the property, signs the acceptance copy and pays the balance deposit for the property (see below).

This article will explain 6 things you need to know before exercising an Option to Purchase and will cover the following stages of exercising an Option to Purchase:

• Seller prepares the Option to Purchase
• Buyer reviews the Option to Purchase
• Seller signs the Option to Purchase
• Buyer pays the Option Fee to the seller
• Upon deciding to purchase the property, buyer exercises the Option to Purchase
• Buyer lodges a caveat over the property

1. What is an Option to Purchase and What is it Used For?

In Singapore, an Option to Purchase is an agreement between the buyer and seller of a property, and is the most common way for parties to enter into a contract for the sale and purchase of property.

Typically, the seller grants the buyer an option to purchase the property based on the terms and conditions in the Option to Purchase, in return of a sum of money from the buyer called the Option Fee.

The Option Fee is typically 1% of the sale price of the property, but is negotiable between parties.

The Option to Purchase is used for the prospective buyer to “reserve” the property. This is because for an agreed period of time stated in the Option to Purchase (known as the Option Period), only that particular buyer will be able to purchase the property and not anyone else.

The Option Period is usually 14 days, but may be negotiated between parties.

Thus, the Option to Purchase is useful as the seller is not allowed to sell the property to any other buyers during the given Option Period, while the buyer has the same period of time to consider whether to go ahead with the purchase.

2. Who Prepares the Option to Purchase and How Can You Get a Copy of It?

A draft Option to Purchase is usually prepared by the seller’s lawyer and sent to the buyer’s lawyer. The buyer’s lawyer will then review the terms of the Option to Purchase, and may request to amend and re-negotiate some of the terms.

Therefore, preparing an Option to Purchase possibly requires several drafts, negotiation and input from the lawyers of both parties.

When all the terms are eventually agreed upon, the seller will sign the Option to Purchase and the buyer will pay the Option Fee.

Each party is usually furnished with a copy of the Option to Purchase.

3. What are the Usual Terms in an Option to Purchase and Why are They Important?

There is no prescribed guide as to what terms an Option to Purchase should contain.

Often, parties use standard form templates provided by their property agents, but this is not ideal as every Option to Purchase should be prepared according to the unique circumstances of each sale and purchase.

However, should a ready-made template be used, you should carefully review the terms to ensure that they are favourable to you, as they are legally binding.

It may also be wise to seek legal advice on the Option to Purchase before signing it, as the seller is not obliged to amend the Option to Purchase after it has been exercised.

OTPs generally contain, but are not limited to, the following essential terms:

Details of the parties

This is important to identify the buyer and seller undertaking the Option to Purchase. Some details include:

• Full names;
• Identification numbers;
• Contact numbers; and
• Registered addresses.

Details of the Option to Purchase

This is important to set out the responsibilities of the buyer and seller when undertaking and eventually exercising the Option to Purchase. Some details include:

• Option Fee;
• Option Period;
• Manner of exercising the Option to Purchase; and
• Whether the Option Fee will be forfeited if the Option to Purchase is not exercised in the manner provided, on or before the expiry date.

Details of the property

This is important to identify the exact property and describe its particulars under the Option to Purchase. Some details include:

• The property’s address given in the certificate of numbering issued by the Inland Revenue Authority Singapore (IRAS) Property Tax Division;
• The property’s site or floor area;
• The property’s sale price;
• Whether the property is sold furnished, and if so attach an inventory list;
• Whether the property is sold on an “as is where is basis” (the buyer accepts the property in the current state and condition);
• Whether the property is sold with vacant possession or subject to tenancy (if applicable);
• Whether buyer is going to move in earlier or later than the agreed date (if applicable);
• Whether there is a right to inspect the property before completion of purchase;
• Any warranty on additions and alterations to the property;
• Any other conditions that the property is sold subject to.

Details of the property’s title

This is important to assure the buyer that the property’s title is ready for sale and purchase. Some details include:

• That the title is properly deduced (property has been inspected and determined to have good title);
• That the title is free from encumbrances on completion (discharged from any claims to the property); and
• That the title is in order (property is registered properly).

Incorporation of the Law Society of Singapore’s Conditions of Sale 2012

Most OTPs contain the Law Society of Singapore’s Conditions of Sale 2012 to set out the buyer and seller’s rights and responsibilities. Some pertinent conditions include:

Condition 6: Outgoings, Rents and Profits until Completion

• The buyer is entitled to rents and profits but, is liable for all expenses and outgoings after the completion date (see below).
• The seller is entitled to rent and profits but, is liable for all expenses, outgoings and levies up to the completion date.

Condition 7: Property Tax, Goods and Services Tax, Withholding Tax and Stamp Duties

• The buyer must pay the following taxes; and
• The buyer and seller must pay their respective stamp duties and withholding tax, as necessary.

Condition 9: Late Completion Interest

• The buyer or seller must pay interest if there is a delay in completion due to their own faults.

Condition 15: Notice to Complete

• Either party may give to the other party a written Notice to Complete if the sale is not completed on the completion date, after which parties must complete the sale within 21 days.

Terms regarding replies to legal requisitions

In an Option to Purchase, there typically is a term providing that the sale and purchase of the property is subject to legal requisitions being satisfactory.

A legal requisition is an application made to certain government authorities to obtain certain information about the property in question.

Examples include:

• Requisitions to the Land Transport Authority (LTA) on whether the road giving access to the property is a public street
• Requisitions to the Public Utilities Board (PUB) on whether the land is affected by drainage reserve.

Obtaining satisfactory replies to legal requisitions is important to ensure that the property is not affected by any fees, notices, charges, alterations, or road widening schemes, among other things.

This term helps safeguard the buyer’s interest as the buyer is made aware of the property’s condition prior to buying it and whether there are any actions that he needs to take with regard to the property.

If there are replies that are unsatisfactory, a property valuer may be consulted to determine whether the value of the property would be affected.

Payment of purchase price to seller’s lawyer

This term is essential to ensure that the seller’s lawyer is duly authorised to receive all payments on behalf of the seller.

This protects the buyer in a situation where the seller’s lawyer takes off with the completion money, as payment to the seller’s lawyer is deemed to be payment to the seller.

Agreeing on a completion date

The date of completion is the date where the purchase of the property is completed. This date may be agreed on by parties, but it commonly is “a date that is 12 weeks from the date of the exercise of the Option to Purchase”.

Generally, parties should agree on a date where both parties have sufficient time to prepare to complete the transaction.

Obtaining the seller’s signature

Finally, the Option to Purchase should be signed and dated by the seller and at least 1 witness.

4. How Do You Exercise an Option to Purchase?

Once a buyer decides that he wishes to purchase the property, the buyer may exercise the Option to Purchase before the Option Period ends, according to the manner set out in the Option to Purchase.

As mentioned above, the Option Period is usually negotiated between parties, but a 14-day Option Period is common.

Sign the acceptance copy and pay the balance deposit

Typically, the buyer needs to sign an acceptance copy of the Option to Purchase and deliver it to the seller’s lawyer, together with payment of an amount known as the Balance Deposit.

The Balance Deposit is usually negotiated between parties, but is often 5% or 10% of the sale price of the property, less the Option Fee.

Upon the signing of the acceptance copy and payment of the Balance Deposit, the contract for the sale and purchase of the property is concluded.

The date of the contract is the date of acceptance by the buyer.

It is not mandatory for parties to sign an additional sale and purchase agreement after exercising an Option to Purchase, as the terms and conditions of any sale and purchase agreement would likely be identical to those in the Option to Purchase.

Sign a caveat

Immediately after the conclusion of the contract, the buyer’s lawyer should lodge a caveat in the Registry of Titles (where the property is registered under the Land Titles Act) or the Registry of Deeds (where the property is registered under the Registration of Deeds Act).

This caveat serves to notify any third-parties of the buyer’s interest in the property, and enables the buyer to know of any subsequent dealings that may affect the property. For example, if the seller attempts to sell the property to another party.

5. What will Happen If the Option to Purchase is Not Exercised within the Deadline?

If the buyer fails to exercise the Option to Purchase within the Option Period, the Option to Purchase expires and the Option Fee is forfeited to the seller, unless the Option to Purchase specifically provides otherwise.

The seller is entitled to keep the Option Fee, and is free to put the property up for sale again.

6. What will Happen If Either Party Wants to Back Out After Signing the Option to Purchase?

If a buyer backs out after having already signed the Option to Purchase, the Option Fee is forfeited to the seller (same as above).

If a seller backs out after having already signed the Option to Purchase, the seller has to refund the Option Fee to the buyer.

Additionally, the buyer may have a claim against the seller for specific performance of the Option to Purchase (i.e. compel the seller to carry through with the contract).

To grant specific performance, the court may look at the conduct of parties to decide whether it would be unjust to allow the parties to go back on their contractual obligations.

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Preparing and entering into an Option to Purchase for the purchase of a completed private residential property can be a complex process, as it possibly involves several drafts of the Option to Purchase and lengthy negotiations between parties.

Furthermore, the seller is not obliged to amend the terms of the Option to Purchase once the signed Option to Purchase has been exchanged for the Option Fee.

In this regard, it is ideal to seek legal advice prior to entering or exercising an Option to Purchase, in order to have someone assist you in negotiating for terms that are more favourable to you, and protect your rights as a buyer.

You may wish to get in touch with one of our experienced conveyancing lawyers to assist you with drafting and exercising your Option to Purchase.