Nov
24

What is an Option to Purchase (“OTP”)?

An Option to Purchase (“OTP”) is the first document between the seller and the buyer which stipulates the basic terms and conditions of the sale of a property. Therefore, before entering into a formal Sale and Purchase Agreement (“SPA”), it is often common for a purchaser to sign an OTP with the seller indicating that the buyer is interested in buying the property from the seller. Sometimes, an OTP will also includes some special clauses or conditions depending on the circumstances.

 

For example:-
1. The sale is subject to loan approval by the financial institution; or
2. The sale shall include the fittings & fixtures and etc.

However, most of the time, the OTP is usually prepared by the real estate agents instead of the parties’ lawyers. The lawyers will only take over the further negotiations after the OTP is signed. Hence, an important advice for you here is that it would be advisable for you to get a lawyer to read your OTP before you sign the same. This is because the real estate agents may not be sufficiently trained to advice you about the legal terms involved and thus might not adequately reflect the real intentions of the parties.

Unlike verbal agreements, OTP certainly has a higher level of contractual effect which is binding on the parties. Therefore, once OTP is signed, you have committed yourself in the sale and purchase of the property and to every item that you have agreed in the OTP. Remember, there will be legal consequences against you which are clearly stipulated in the OTP if you choose not to sign the SPA. Hence, a wise Property Hunter shall not overlook the importance of an OTP.

The Basic Terms and Conditions in OTP
1. The details of the property
An OTP will defines the location and description of the Property that you are buying from the seller. Therefore, you must make sure that the property that you intend to buy is the one described in the OTP.

 

2. The name of the parties
The name of the seller and the buyer will be stated in the OTP. Remember, the seller and the buyer shall not be a minor who is under age of majority (18 years old) and/or a person is adjudicated as bankrupt. If the seller is a company, you must make sure that the OTP is signed by the director or an authorized personnel to sign for and behalf of the company.

Tips!
In the event that you have not decide the name of the buyer to be included in the SPA, you may insert a clause or a provision in the OTP which allows you to nominate another person in your place for the SPA.

 

3. The payment details
The following details should be stated in the OTP:-
1. The Total Purchase Price of the property;
2. The Earnest Deposit;
3. The Balance Deposit; and
4. The Balance Purchase Price of the property.
You must take note of the time frame to make the relevant payment to the seller in order to avoid penalties such as late payment interest.

Tips!
If the payment dateline is unreasonably short, there is a risk that you may not be able to make the relevant payment on time. On the other hand, over providing a payment dateline will unnecessarily prolong the entire sub-sale transaction.

 

4. The time frame to sign a SPA
The time frame to sign a SPA by the parties will be stipulated in the OTP. It is usually within 14 days or 14 working days from the date of acceptance of the OTP by the seller. However, you must take note that such time frame may be varied according to the intentions of the parties.
Remember, non-compliance of the above shall allow the seller to forfeit your Earnest Deposit.
Tips!
To appoint a lawyer to represent you before the signing of the OTP. Get the lawyer involved as soon as possible to safeguard your interest. Such precaution will lower your risk from unwanted circumstances.

 

5. The clause of “As-is-where-is”
This clause is commonly used in a sub-sale transaction. It actually means that the Property is sold in the condition and state when you sign the SPA and as per your last inspection, subject to wear and tear.

Please specifically mention in the OTP if there is any specific furniture or items that you wish to have along with the property that you purchased. This is because the seller might want to retain some of the fixtures and fittings from the property. Don’t be surprised if the property that is delivered to you later is substantially different from the one represented to you by the seller during your inspection of the property.
Tips!
A joint inspection with the seller is crucial. If there is any defect detectable in the property and the seller has promised to repair the same, you may consider including it as a Special Condition. Otherwise, it can be a great negotiating tool to bargain the price of the property before the sale is concluded. Normally in such circumstances, you are advised to incorporate another joint inspection of the Property prior to taking delivery of the same.