Options to Purchase May Leave Few Options

By Fred Moreno, Chief Deputy Legal Counsel

Have you ever had a client under a lease with an option to purchase who wants to assign their option? Chapter 47G of the North Carolina General Statutes governs option to purchase contracts executed with residential lease agreements. Recently, the North Carolina Court of Appeals handed down a decision regarding the assignment of an option in a lease and determined that, in that case, there was no interest in real property that could be conveyed.

Last year, the North Carolina Court of Appeals published its decision in Cabrera v. Harvest St. Holdings, Inc. (“Cabrera case”). In this case, the Plaintiffs were tenants of a commercial property where they operated their auto mechanic shop. The property owner later became interested in selling his property to Plaintiffs, so the parties entered into an option to purchase contract where the Plaintiffs would pay $2,400 per month as lessees for a period of nineteen (19) months. This lease/option agreement went on to say that during this time, the Plaintiffs could elect to purchase the subject property for $150k and that title to the property would transfer upon full payment of that amount to the owner. The lease/option agreement was not recorded with the Register of Deeds. At some point later on, the Plaintiffs decided to sell their interest in the lease/option agreement to the Defendants for $140k.  After going under contract, the Plaintiffs decided they no longer wanted to sell their interest and tried to void the contract. The Defendants then bought the subject property directly from the owner, and the deed was recorded with the Register of Deeds. The Plaintiffs then sued and argued that the lease/option contract that they retained gave them an interest in the subject property.

The NC Court of Appeals, citing the NC Supreme Court case of Mizell v. Dennis Simmons Lumber Co. in a 1917 opinion, said “Generally, option contracts do not themselves create any interest in the property, but only amount to an offer to create or convey such an interest when the conditions are performed, and working a forfeiture when not strictly complied with.” The court went on to say, “In other words, until the option is exercised, the optionee does not hold any property interest to the property in question.” The court found that the Plaintiffs never exercised the option to purchase in the lease/option agreement and therefore never had an interest in the property that they could assign, transfer, or sell. If anything, the agreement between the Plaintiffs and the Defendants only transferred the right to purchase the property under the lease/option agreement.

This is an interesting case and one that brokers should be aware of when dealing with wholesalers. Although this case involved commercial property, the reasoning of the court could provide a similar outcome in a residential transaction. Since the tenant of a lease/option agreement is not the property owner under the reasoning of the Cabrera case, the tenant may not have any real property interest that the broker can market for the tenant. Even if the tenant has exercised the option to purchase and may now have a real property interest, their interest is limited to assigning their option to purchase the subject property, and only then if their agreement allows such a transfer.  If you come across such a transaction, seek legal counsel before you list to be sure you know what you are listing, and how it can and should be advertised.