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Purchase Options: Strict Compliance Required

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Former Counsel
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By:  Kevin Parker

In a rising real estate market, we tend to see more disputes relating to purchase options.  Given the increase in value, the property owner would rather avoid the option and sell at a higher price.  The option holder can make a large profit by simply exercising the option.  In 2003, the Arizona Supreme Court set forth many important legal principles relating to option contracts in real estate transactions.  In Andrews v. Blake, 205 Ariz. 236, 69 P.3d 7 (2003), the lessee of a plant and tree nursery had an option to purchase the property for $300,000.  The owner/landlord claimed that the lessee failed to timely exercise the purchase option.  The owner had found another buyer at $950,000.  The option contract required exercise by written notice via personal delivery, commercial delivery service, courier, or certified mail return receipt requested.  The option holder claimed to have exercised the option by regular mail (not one of the specified methods).  The owner denied receiving the notice.  In working through these issues, the Arizona Supreme Court set forth numerous important legal principles, including the following: 

  • Option contracts are “strictly construed.” 
  • Time is of the essence in option contracts, even when the contract does not include express statement to that effect. 
  • If the optionee negligently fails to timely and properly exercise an option to purchase, the optionee will not be entitled to equitable relief. 
  • An optionee’s nonnegligent failure to strictly comply might be equitably excused only when the failure is caused by incapacity, fraud, misrepresentation, duress, undue influence, mistake, estoppel, or the owner’s waiver of its right to receive notice.  (With respect to “mistake,” the court further noted that a mistake cannot be based on a negligent act or omission, and forgetfulness is not the equivalent of a mistake.)
  • Even if the optionee might theoretically qualify for one of the aforementioned nonnegligent circumstances under which equitable relief could be available, an optionee’s failure to timely exercise an option may be excused only if three additional prerequisites are met: (1) the delay was short, (2) the delay did not prejudice the owner, and (3) the optionee would suffer a forfeiture or other substantial hardship if equitable relief is not granted. 

Another area of potential dispute arises when the option contract does not specifically identify a date by which the option must be exercised.  In that scenario, one Arizona case has held that a reasonable time period will be judicially implied where none is specified in the agreement.  Byke Construction Co., Inc. v. Miller, 140 Ariz. 57, 680 P.2d 193 (App. 1984).