Option agreements on land can be used a number of ways in farm succession or consolidation of farm interests in co-tenancy. Such options serve as a “foot in the door” for parties interested in land they do not presently own, but would like ensure an opportunity to purchase the land should a sale of any interest become available.
As discussed elsewhere in this booklet, a business entity that owns land as an asset will often have an “internal marketplace” of options to ensure that ownership of the entity (and thus the land asset) remains within a closed universe of potential owners. Likewise, a Tenant-in-Common Agreement operates much the same way. Outside such arrangements, stand-alone option agreements attaching directly to the land interest usually take one of two forms: a right of first refusal and a right of first offer.
Right of First Offer (Option to Purchase)
A right of first offer requires that the landowner (full or partial interest) offer the sale of the interst in the real property to the optionee, prior to seeking other offers to purchase the property or partial interest therein. Because this type of option necessarily precludes any defacto valuation by a third party offer, there must be a mechanism for establishing a purchase price for the property based on fair market value. Absent agreement between optionor and optionee on a fair price, this must be done by a third party, the most reliable being a licensed appraiser. Such valuation language might appear as follows:
Purchase Price. The purchase price of the Property must be its fair market value as determined by an appraiser chosen by Optionor, his executor, trustee or heirs, and paid for equally by Optionee and Optionee. If Optionor refuses to select an appraiser within thirty (30) days of the Option Notice, Optionee may select an appraiser, whose valuation of the Property is final. If Optionee of Optionor disagrees with the fair market value opinion of the first appraiser, the disagreeing party may select a second appraiser at split cost between Optionee and Optionor. The mean average of the two appraisals is then determinative of the purchase price.
A particularly generous optionor may agree to sell the property at its highest property tax valuation (as opposed to its present use valuation, if applicable). Some parties have been known to use what is known as an “OPAV” (Option to Purchase at Agricultural Value) when the land subject to the property is under conservation easement, whereby the “restricted value” of the land has been appraised as part of a conservation easement transaction. Of course the parties could agree on a more informal route than an appraiser, such as a local real estate agent, but the optionee should be careful to monitor the option window he or she has available.
Right of First Refusal
The options discussed above—given the optionor’s likely wish to liquidate their interest in the property—are often time-limited, whereby the optionee has a relatively short window of time to notify the optionor of their election to purchase, and another to close on the purchase. The optionor may require proof of funds or a financing commitment (along with an earnest money deposit) to secure the option election.
In North Carolina, options on real property are limited to thirty years (30) if exercised with a party who does not also own an ownership or leasehold interest in the land subject to the option.1 Therefore, an option exercised in favor of a co-tenant (and perhaps their successor[s] in interest, most likely lineal descendant[s]) could extend beyond this period. Likewise, for an optionee with a long term lease on real property may have an option extending beyond 30 years.
Examples of Option Use
Though there are many, below are some scenarios of possible option use, with some suggested instrument language. For example:
Xavier, the settlor of a trust, directs the ultimate distribution of his separate land parcels between a daughter—who is farming—and a son who does not farm. The trust instructs the Trustee—as a condition of distribution of title to the land parcels to the son—to execute and properly record an option to purchase in favor of the daughter on the land to be distributed to the son. The trust sets forth detailed language regarding valuation of the real property that is part of the option. Xavier even includes a financing mechanism, whereby his daughter can purchase the land in installments.
A variation on the above might be where Xavier instructs his trustee to execute mutual options, whereby any of his lineal successors have the option to purchase land titled to others.
Another example involves land adjacent a subdivided parcel:
Silvio owns a 43 acre tract of land in Chatham County, NC. To generate cash, Silvio surveys and subdivides his tract into a 15 acre tract, which he puts up for sale. Silvio retains and resides on the remaining 28 acre tract. The purchaser of the 15 acres, Paulie, negotiates as part of the purchase an option to purchase any or part of the 28 acre tract should Silvio or his devisees/heirs wish to sell the tract. The agreement includes a right of first offer and right of first refusal.
Note that Silvio’s tract may be in forest management, and he could reserve timber rights on the property (at the least, the option should be worded to ensure that a timber deed to a third party does not trigger the option). Also, a clause may be inserted to require that if any co-tenant initiates a partition proceeding, the option to purchase is triggered in favor of the optionee.
Recording Option in Chain of Title
As with any interest in land, the option agreement must be in writing and must be noted in the chain of title for the real property it concerns.2 Though an entire option agreement could be recorded, a memorandum is standard practice, which must include the following:
- The names of the parties thereto;
- A description of the property which is subject to the option;
- The expiration date of the option;
- Reference sufficient to identify the complete agreement between the parties.
The NC statutes provide a suggested form of memorandum for recording.3
1 N.C.G.S. §47-29. The statute defines the option (a “preemtive right in the nature of a right of first refusal in gross with respect to an interest in land” as “preemptive right in which the holder of the preemptive right does not own any leasehold or other interest in the land which is the subject of the preemptive right.” (N.C.G.S. §41-28(3))
2 N.C.G.S. §47-18
3 N.C.G.S. §47-119
Publication date: April 21, 2022
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