What is the Difference between Option to Purchase (OTP) and Offer to Purchase?

When you're diving into the property-buying world, you're gonna run into these acronyms: "Option to Purchase" (OTP) and "Offer to Purchase" (also, OTP - confusing, right?).

To keep it simple, we usually call "Option to Purchase" just "OTP," while "Offer to Purchase" gets shortened to "Offer."

Let me simplify these two terms for you for you:

1. Option to Purchase (OTP):

  • This one’s the real deal, legally binding and all.
  • It gives the buyer the special right (but not the must-do duty) to buy the property within a set time at an agreed price since seller cannot entertain other offers anymore
  • Of course, the buyer throws in a fee for this VIP privilege.

2. Offer to Purchase (Offer):

  • It’s a bit more flexible as it is not legally binding ONLY IF you have the phrase “subject to contract” and the seller is able to give a counter offer
  • The buyer pitches a formal proposal to the seller with the details such as price, financing, and when will the transaction take place
  • If both sides give it the thumbs up, it then proceeds to OTP
  • So, to sum it up, OTP is like a commitment, while Offer is more of a “I am very serious and let’s talk about it” (Remember: It is not legally binding if you have the phrase “subject  to contract”

So, to sum it up, OTP is like a commitment, while Offer is more of a “I am very serious and let’s talk about it” (Remember: It is not legally binding if you have the phrase “subject  to contract”

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The Financial Implications of Option to Purchase (OTP)

An OTP is usually issued by the seller to the buyer once the seller and buyer both agree on the offer. The OTP binds only the seller before it is exercised as the seller cannot entertain any other offer once the OTP is issued until it expires. To offset this risk taken by the seller, the buyer has to pay an Option Fee which is usually 1% of the purchase price when signing the OTP.

As the buyer paid the 1% Option Fee (consideration), this makes the OTP legally binding. This is when there is a penalty involved if either party backs out of the deal. 

If the buyer backs out and decides not to exercise the option before it expires, the seller is entitled to keep the option fee. On the other hand, if the seller backs out after signing the OTP, they must refund the option fee, or the buyer can file a claim for specific performance to ensure the seller fulfills their obligations under the OTP.

The Importance of Offer to Purchase (Offer)

So, when the buyer is tossing in an offer, they also have a choice to give the option fee in advance to show their sincerity in buying the property. But here’s the deal: the seller can’t cash in on that check until they’ve given the green light to the offer and issue the OTP.

Now, if they’re not feeling the offer or time’s up on the deal, that option fee has to be refunded to the buyer as offers are not legally binding.

Don’t underestimate the significance of the offer just because it’s not legally binding upfront. The way you lay out the details in the Offer affects the real deal – the OTP. So, it’s not just a warm-up act – it’s like the opening scene for the legal storyline. The offer sets the stage for what comes next!

In the infamous Montebleu Condo incident of 2013, a noteworthy example unfolded where the option period specified in the Offer changed from the conventional “14 days” to “3 days“. To show his sincerity, the buyer presented a cheque amounting to 1% of the purchase price as the option fee in advance.

The seller accepted the offer and issued the buyer an OTP according to the terms in the Offer, which includes the three-day option period. The twist in the tale emerged when the three-day option period coincided with the Chinese New Year holiday, and the seller’s solicitor office remained shuttered. Consequently, the buyer faced a hurdle in submitting the signed OTP documents within the stipulated time frame. Despite attempting submission post the holiday, the seller rejected it, citing the expiration of the OTP, and expressed intent to retain the 1% option fee.

Ultimately, the case went to Court, and the Court adjudicated that a binding agreement had transpired between the buyer and seller due to the acceptance of the option fee by the seller and the absence of a “subject to contract” clause in the Offer to Purchase. Thus, the Court ruled in favor of the seller, and the 1% option fee was forfeited.

 

The “Subject to Contract” clause is a widely used provision when either party desires to postpone the establishment of a binding agreement. This clause empowers both buyers and sellers, granting them the flexibility to engage in negotiations before committing to a formal, legally binding contract.

In practical terms, if buyers intend to avoid immediate binding obligations set forth in the offer, it is advisable to explicitly incorporate the “Subject to Contract” clause in their offer letter. This inclusion communicates the mutual understanding that, while expressing intent, the offer does not trigger an immediate commitment. Instead, it allows for extended negotiation and discussions before solidifying the agreement in a legally binding contract.

Conclusion

When you’re dealing with OTP, always be careful of the terms stated in the OTP as it is legally binding. If not, be prepared to potentially lose a ton of money.

On the other hand, when dealing with Offer, remember to include the term “Subject to Contract” so as to avoid a Montebleu incident.

Recognising these pitfalls is crucial for both buyers and sellers, providing a clear understanding of the contractual aspects and legal implications at various stages of the property transaction.

Still, when dealing with legal documents such as these, it’s always a good idea to get advice from the pros (lawyers), especially with the lingo and rules changing depending on where you’re at.