Real Estate Options and the Doctrine of Equitable Conversion

Real Estate Options and the Doctrine of Equitable Conversion

Under what is known as the doctr__in__e of equitable conversion, once a real estate purchase agreement is signed by all parties and becomes effective, the buyer be- comes the equitable owner and the seller retains bare legal title to the property under agreement. However, under a real estate option, the equitable conversion does not occur until after the option is exercised and not when the real estate op- tion agreement is signed by all parties and becomes effective. This is because there is no legal obligation to buy and sell until after a real estate option is exer- cised. After a real estate option is exercised, the optionee-buyer retains equitable ownership of the property.

The difference between a real estate option agreement and a standard pur- chase agreement is that there is no contractual obligation to purchase the prop- erty. For example, when a buyer and seller sign a purchase agreement, they become legally obligated to buy and sell the property under contract, and either party can be sued if he or she fails to do so. However, when an optionee and op- tionor sign a real estate option agreement, the optionee has no contractual obli- gation to purchase the property under option. An optionee can let a real estate option expire, and an optionor has no legal recourse against the optionee.



Why a Straight Real Estate Option Agreement Is Not an Executory Contract

An executory contract is generally defined as: “a contract where both parties have an obligation to perform in the future.” And state and federal courts nationwide have traditionally held the view that straight or naked real estate options are uni- lateral contracts, under which the obligation to perform rests solely on the op- tionor, while the optionee is under no obligation to do anything whatsoever. The only notable exception to this is when an option agreement is included in a fed- eral bankruptcy petition and the optionee has notified the optionor of his or her intention to exercise the option prior to the bankruptcy petition being filed.