Option to Purchase

Option to Purchase

Signing an Option to Purchase (OTP) is an integral part of the conveyancing process when buying or selling real estate in Singapore. While setting a standardized set of rights and obligations for both the seller and the buyer, this document reserves the property for the buyer, determines the procedure for the future transfer of title and, in many cases, acts instead of the sale and purchase agreement after being exercised.

Although the parties to real estate transactions in Singapore sometimes may or are even required to use a standard form of the OTP, in most cases this agreement is prepared individually by the seller’s legal counsel and is reviewed by the buyer’s lawyers. Taking into account the cost of Singaporean residential and commercial real estate, it’s always advisable to have experienced conveyancing lawyers to review the OTP first before signing to make sure it protects the lawful interests of the parties and ensures smooth conveyancing.

What is an Option to Purchase?

While the Option to Purchase a property in Singapore includes all of the terms and conditions of sale and often replaces the sale and purchase agreement, these documents are not the same. While the latter binds the seller to transfer the title as well as obliges the buyer to pay the purchase price, the Option to Purchase only reserves the buyers’ right to buy the property under specified terms for a limited period of time.

Committing to the Option to Purchase, the buyers must pay an option fee, which is most often set at 1% from the purchase price. Meanwhile, when paying the option fee outright, many buyers often overlook the importance of proper due diligence on the property and having the loan secured from the bank in case the financing is needed. A failure to do so may lead to losing the option fee which would be forfeited by the buyers if they decide to back out from the transaction at the later stage. Given the prices of Singaporean properties often exceeding seven-digit figures, careful planning and the help of experienced lawyers can save considerable money and effort for all parties involved.

What Terms Are Included?

That being said, an Option to Purchase includes all the terms of the anticipated sale and purchase deal, which will be completed after the Option is exercised. For this reason, the OTP shall be analyzed with the same scrutiny and due diligence and be tailored to each transaction.

Even though many terms of an Option to Purchase are standardized and based on the terms of the Law Society Conditions of Sale 2012, each aspect of the transaction shall be carefully described, including, among others:

  • Property and Price. In addition to setting the exact price, the Option to Purchase shall include the address, square footage, indication of the floor or land plot; whether the furniture, fixtures, or appliances are includes; condition of property, including descriptions of defects, if any, e.g., paint chips, holes from picture hangers, minor dents, and other signs of wear and tear, etc.
  • Parties to the Transaction and Title Details. The OTP shall name all the parties, including the sellers and the buyers, providing their identification numbers and contact information. It shall also provide information about the title and shall confirm the absence of any claims on property or other encumbrances.
  • Terms of the Option to Purchase. These shall include the period during which the buyers have the property reserved for them, the amount of the option fee, the procedure for exercising the OTP, as well as other related terms.
  • Procedure for the Transfer of Property. The OTP shall specify if the buyer has the right to additionally inspect the property before transfer of title, whether the property is sold vacant or with a tenant, the possession period before the seller vacates the property, and other terms related to physical transfer of real estate from the seller to the buyer.
  • Payment of Conveyancing Money. The terms of the Option to Purchase shall outline the procedure for paying so-called conveyancing money, including the rest of the option fee and downpayment for the property. These terms shall also specify the way the payment shall be made: whether the buyer transfers funds to the conveyancing account opened with the seller’s lawyer, pays to an escrow account, or uses other options, such as the conveyancing account with the Singaporean Academy of Law.
  • Exercising the OTP and defining the completion date. These terms shall describe the procedure for exercising the Option to Purchase, after which the parties enter in a sale and purchase agreement as well as define the completion date when the transaction is considered as closed.

Concluding and Exercising an Option to Purchase

In most cases, the buyers sign an Option to Purchase and pay the option fee more or less immediately after they identify a real estate that fits their requirements in order to keep it before the buyers are ready to close. As was already said above, this is not always the best strategy and it’s worthwhile to start a conveyancing process even before the option money is paid.

  1. Preparatory Stage and Due Diligence on Property. Except for transactions involving HDB flats, which presume signing a standard OTP, available on the website of Housing and Development Board, in other situations, the Option to Purchase is drafted by seller’s lawyers. The draft is sent for review to buyer’s attorneys who check its terms, run due diligence on the title and property, determine if the property has a “good root” of title and available for sale, make amendments in the agreement if required, and submit the approved text for signature to the buyer.
  2. Signing the OTP and Paying the Option Fee. After the buyers sign the Option to Purchase, they pay the option fee, which starts the countdown before the OTP shall be exercised. Although buyers’ lawyer takes a bigger load of the preparatory work, the buyers will also be busy securing the loan, if this was not done before signing, approving the deal among future co-owners, if any, and finalizing other arrangements. Whatever the case, the buyers have a preset period of time before they should exercise the OTP and pay the rest of the conveyancing money or the deal will fall through.
  3. Exercising the Option to Purchase. When the buyers have finalized all checks, approved financing, and are ready to proceed with the transaction, they exercise the OTP and pay the rest of the conveyancing fee and downpayment, which can total up to 20% of the price of the property. At this stage, the buyer signs the acceptance of the Option to Purchase, which is equivalent to starting the contract of sale and purchase with the seller.
  4. Placing a Caveat on Property. After the OTP is exercised, the buyer’s lawyer lodges a caveat on the property with the Singapore Land Authority, which secures the real estate with the buyer and excludes any further transactions with the property for the seller. After the SLA accepts the caveat, it will be visible on the website of the Integrated Land Automation Services (INLIS) for any other potential buyers or their lawyers during their title search.

Backing out From the Deal

In some situations, either the sellers or the buyers decide to back out from the transaction for various reasons such as simple change of plans or bank’s unexpected refusal to issue a loan. Whatever the reason behind such a decision, the parties bear the consequences, foreseen by the Option to Purchase.

By its nature, the OTP secures a property for the buyer for a specified time, depriving the seller of the right to make an offer to other interested parties. For this reason, when buyers decide to cancel the Option to Purchase, they lose the option fee paid to the seller.

If the transaction falls through due to sellers backing out, the seller shall return the option fee to the buyer. The buyers may ask for additional remedies by suing the sellers for specific performance, but it will be up to the judge whether the seller will be ordered to proceed with the transaction, provided that the buyers have fully complied with their obligations.

Summary

Concluding an Option to Purchase is a standard part of the conveyancing real estate in Singapore, which secures buyer’s right to buy the property for a specified period and defines all the terms of the anticipated sale and purchase agreement. Therefore, the terms of the OTP shall be carefully analyzed as they become binding for all involved parties after signing with the risk of losing the option fee or facing a claim for specific performance.

Although the standard texts of the Option to Purchase do exist, in most cases, their terms are not sufficient and do not reflect the buyer’s and seller’s individual circumstances. Careful drafting of the Option to Purchase by the seller’s attorneys as well as the analysis of its terms by buyer’s legal counsel allows to account for all individual terms of the transaction to ensure smooth completion or a way to retreat agreeable by all the parties should the latter be necessary.

About the author

Mohammed Shakirin
Mohammed Shakirin

Partner

Mohammed Shakirin graduated from the highly selective Graduate LLB program at the National University of Singapore with a Bachelor of Laws (Hons). He covers a wide range of legal areas for his clients.

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