Pitfalls in drafting options to purchase in New Mexico

Options to purchase real estate are traditionally a one-sided deal-only one party to the contract may exercise the option under its terms. The option holder is not bound to purchase, and if the conditions are not fulfilled, the optionee never acquires the right to purchase.

Often courts are called upon to determine whether an option holder seeking to exercise the option has complied with all the conditions. In a recent case the New Mexico Court of Appeals was faced with the opposite situation-if an option holder does not exercise the option, does he or she still have to pay for it?

Option was silent on termination

In Garcia v. Sonoma Ranch East II, LLC, the optionors granted a company an option to purchase real property, but when the optionees failed to make the first annual payment under the option agreement, the optionors sued them for breach of contract. The district court held that since the option contract had a provision for annual payments to continue the option rights, the failure to make a payment ended the option rights and any obligations owed to the optionors.

The court in Garcia noted several times that if the option agreement had contained a provision about termination or notice of intent not to exercise the option, the issue would be compliance with that provision. The only provision about notice was one requiring that the optionors be notified if the option was to be exercised. The annual payment could not be interpreted as representing payments for option time passed, as they were required to keep the option open from year to year.

Imprecise drafting leads to court

The way the option contract in the Garcia case was drafted did not provide for notice for any failure to exercise the option, and did not have any provisions about termination. It generally stated that the optionees "were paying" the optionors the amount of the entire purchase "for the grant of the option."

The court said that meant the sum was the full consideration for the option if the optionees elected to let it continue its full term, ending with a purchase. Any other interpretation would not be commercially reasonable according to the court, and would not be in line with the unilateral nature of an option. The optionors were ultimately not allowed to enforce the option, and it gave the optionees the unfettered right not to exercise it.

Option advice from the professionals

Real estate professionals recommend that options contain the price for the option, the length of time it runs, the notice required to exercise the option, and the consequences of not exercising the option. They also advise that a purchase agreement be included listing the eventual full price for the property in some way, even if it is not specifically agreed to at first.

A reference to the consumer price index or some other accepted real estate valuation method would satisfy that requirement. The option price and any installment payments to keep the option open can be credited to the purchase price or down payment on the property.

Contact an attorney for drafting an option

The struggle of the court to determine the intent of the parties in the Garcia case shows how important it is to have an experienced real estate attorney draft your documents. When you decide to take the step of becoming a property owner, make sure you have good legal representation in drafting any option or purchase contracts you may need.

  • New Mexico Board of Legal Specialization
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