CHAPTER II.-  Lease with option to buy

The lease with an option to purchase is an atypical contract that consists of the insertion of a clause by which the lessee gives his consent to purchase the leased object within the period specified therein ( TS 6-7-01, EDJ 15262 ; 3-4-06, EDJ 37225 ).

Although the purchase option contract may be principal, due to its substance and cause, and unique, as it is not coupled to any other, the usual assumption is that this contract is incorporated into another different contract , the typical case being its integration into a lease contract, in which the option right falls on the leased object.

This is a complex contract in which the right of option is an addition to the subjective right that the lessor grants to the lessee: the right to acquire ownership of the leased property in addition to its use (TS 25-5-92; 29-3-92). In this way, leasing and option to purchase appear as two legal transactions linked together, formally united in the same document ( TS 13-7-93, EDJ 7043 ).

1) Although both the lease and the purchase option are regulated separately by law, the lease with purchase option is an atypical contract, because it does not have specific regulation : they are subject to the autonomy of the will and freedom of agreement of the contracting parties and, in what they do not foresee, in a supplementary manner, by the rules that regulate other similar contracts and jurisprudence ( CC art.1091 and 1255 ).

2) The opposite scenario of an option contract to which a lease contract is incorporated is possible, although certainly rare (TS 5-4-99).

Purchase option contract

This contract has no specific regulation in our legal system. It is governed by the general provisions of obligations and contracts and, in no case, by the special law on leases.

It is an agreement by which the grantor or option holder grants the option holder or beneficiary the power to decide whether or not to enter into another main contract of sale, within a certain period and under certain conditions. This contract may be accompanied by the payment of a premium by the option holder ( TS 18-2-15, EDJ 16320 ; 18-5-05, EDJ 76740 ; AP Sta. Cruz de Tenerife 23-6-06, EDJ 265054 ).

This is a consensual contract , which is perfected by mere consent, without it being necessary in principle to hand over the property for the option title to come into legal life. However, when the option is integrated into a lease, it is usual for the tenant to be in possession of it, occupying it in this condition.

The obligation arising from this is unilateral in nature , since only the grantor is obliged to maintain his offer and not to dispose of the property to be sold for a certain period of time. The option holder has the right to accept it or let it expire with complete freedom of decision during the same period ( TS 18-10-93, EDJ 9187 ; 31-7-96, EDJ 5740 ). However, this does not exclude the possibility of it being configured as an onerous and bilateral contract when a premium is agreed as a reservation ( TS 22-6-01, EDJ 13855 ). In this case, if the option is not exercised, expiring the right, it is usual to agree that the grantor (lessor) takes the premium.

Clarifications

When entering into an option to purchase, the offer may be made manifest with conditions to which the offeror considers essential conditions , such that, if they are not strictly fulfilled, the concurrence of the offer and acceptance does not occur. This does not contradict the nature of the option contract or its submission to the general rules of obligations and contracts, since the principle of autonomy of the will applies ( TS 17-11-86, EDJ 7369 ; 9-10-89, EDJ 8887 ).

Elements of the contract

According to its own definition, the essential elements of the call option can be summarized as follows:

a) The express granting to the option holder of the right to decide unilaterally and exclusively regarding the completion of the purchase.

From a functional point of view, the purchase option is unilateral, that is, it generates, by its own dynamics, obligations solely for the grantor . The latter is obliged to ( TS 5-7-06, EDJ 98683 ; 14-2-97, EDJ 720 ):

– have the asset subject to the option available to the option holder during the agreed period;

– not having the offered goods;

– maintain the offer for the agreed period, selling at the time when the bidder exercises his right.

Non -compliance by the grantor entitles the option holder to request forced execution of the sale ( TS 5-6-06, EDJ 80763 ; 11-4-00, EDJ 5724 ).

b) The determination of the property -object- on which it falls, so that the future sale is fully configured.

c) The specification of the stipulated price for the future acquisition. This is especially important since the option is materialized with the simple declaration of will of the option holder, validly transmitted to the option holder, without the need for a new agreement between the parties. If the price is not determined, it will not be an option contract, but, at most, a simple promise to carry out the option in the future.

However, it is permitted that a specific price is not stipulated, as long as it is capable of being specified, for example, because its determination is established by an alternative between two different prices ( DGRN 27-5-03 ).

An accessory element is the payment by the option holder of a premium or price for the option, which is generally deducted from the final price to be paid in the sale ( TS 25-11-11, EDJ 270373 ; 17-9-10, EDJ 279581 ; 18-5-05, EDJ 76740 ). That is, it can be absorbed by the sale price, once it is concluded, or operate independently of it ( TS 18-4-01, EDJ 6375 ).

In cases where payment of a premium or price is agreed, the purchase option becomes bilateral , also generating obligations for the option holder.

d) The specification of a period for exercising the option.

Clarifications

The purchase option contract is valid in which it is up to the buyer to determine the amount to be paid from the already established price once the appropriate deductions have been made ( DGSJFP Resol 27-10-20 ).

Expiration, waiver or withdrawal

In the event of waiver or withdrawal by the option holders of the purchase option, it is necessary that the loss of the premium be expressly provided for in the contract for this to occur ( AP Barcelona 24-1-17, EDJ 237552 ).

The expiration of the option only produces the effect of extinguishing the contract and not a breach by the option holder to which CC art. 1124 is applicable . This extinction produces the necessary consequence of returning the price when the parties have not agreed on their loss due to failure to exercise the option, since the opposite would constitute unjust enrichment, especially in the case where the premium was to form part of the total purchase price in the event of exercise of the option right ( TS 19-2-20, EDJ 512948 ; AP Baleares 16-10-01, EDJ 65984 ).

However, there is also case law that supports the opposite thesis: the loss of the premium is inherent in the event that the lessee-option holder does not want to exercise the option, even if it is not expressly established in the contract. There is no breach of contract for not exercising the option or for losing the premium: it is a natural effect of this contract, typically speculative, since the option is exercised if the price of the asset has risen at the time of exercise with respect to that of the contract; it is not exercised otherwise, and the risk for both parties is mitigated by the loss of the premium for the option holder – who in exchange will not receive an undervalued asset – and by the gain of the premium for the option holder – who in exchange keeps the undervalued asset – ( AP Córdoba 16-6-17, EDJ 167704 ).

Clarifications

It has been questioned whether, for the valid and effective exercise of the purchase option, the option holder must have fulfilled his obligation to pay the option price ( TS 12-2-99, EDJ 1790 ); or whether the premium is considered an eventual contribution whose non-compliance only entitles one to claim its payment (TS 29-3-93, EDJ 3091).

Legal nature

There has been some discussion about the legal nature of the option to purchase, specifically whether the option right is real or personal in nature, a question of great importance when the right is projected onto real estate.

The option does not bind the grantor only in the sense of accepting the projected contract if the option holder decides to conclude it, but it also imposes on him a negative obligation , that is, the obligation not to enter into other contracts with a third party while the option is in force. In this sense:

• If the right to purchase is considered to be of a personal nature , effective only between the parties, in the event that the grantor contracts with a third party in relation to the object of the option, the option holder could only claim compensation for damages from the grantor, without having any action against the third party.
• If, on the contrary, it is considered that the right to purchase option has a real nature and the grantor contracts with a third party while the option is in force, the option holder has direct action against said third party, having acquired the burden of the option.

At the same time, when the purchase option is included in a lease, the implications that a possible transfer of the property to a third party may have on the lease itself must be taken into account. See, for the case of housing, no . 630 .

Effects

In general, it can be said that the option to purchase is a right of a personal nature, to which access to the Property Registry attributes certain real effects, without these modifying its legal nature. This implies the following:

• Before registration , the purchase option has no real effect, since it does not grant any immediate right over the object of the contract, but only the power to demand a certain behaviour from the grantor, and cannot be made effective against a third party. If the option has not been registered, non-compliance only gives rise to the appropriate compensation for damages. The contracts entered into are effective and the third party does not have to bear the exercise of the option, without prejudice to deeming null and void, due to the illegality of the cause, the transaction entered into between the promisor of the option and the third party with the precise purpose of circumventing the right of the option holder.
• After registration , the option is enforceable against third-party purchasers because it encumbers the thing as an inherent burden, but without the registration itself changing its legal nature, since it does not grant the option holder immediate power over the thing but only the possibility of deciding its acquisition against third parties (Díez Picazo).

Clarifications

1) Effectiveness against third parties implies that, when the option is correctly exercised, all rights and liens established after the registration of the option are extinguished, since this means real significance and, consequently, the cancellation of the registry entries – LH art.79.2 – ( TS 5-11-03, EDJ 146398 ).

2) The registration of this right is dealt with in no. 370 .

Distinction from other similar figures

Although the option to purchase has its registered aspect recognized ( RH art.14 ), and its regulation is ultimately referred to the general provisions of obligations and contracts, which replace, where appropriate, the will of the parties, it is not expressly regulated in the Civil Code ( TS 13-11-92, EDJ 11188 ). This lack of specificity makes it necessary to distinguish the option to purchase from other similar figures.

a) Promise of sale.While in a promise the parties do not sell and buy, but rather are obliged to sell and buy by means of granting a subsequent sales contract – that is, to give their consent at a later date – in an option, the grantor has offered the sale which will be perfected once the option holder exercises his right – without the need for a new consent from the grantor.

Furthermore, in the promise of sale both contracting parties can compel each other to comply, while in the option only the option holder has that power.

Although the doctrine has considered that the purchase option contract fits into the figure of “promise to sell or purchase” ( CC art.1451 paragraph 1 ), the jurisprudence has been categorically rejecting it ( TS 17-5-93, EDJ 4625 ; 14-5-91, EDJ 5046 ).

b) Unaccepted unilateral promise . This promise is the formal declaration of a subject’s willingness to sell or negotiate a certain thing for a certain price during an equally predetermined time. Such a declaration may be directed to a specific individual or to a group.

This modality differs in two fundamental aspects:

– in the option, the promisor grants to a beneficiary the exclusive decision-making power, in the unilateral promise the offer is addressed to everyone, it is generic;

– On the other hand, while the option is a true contract, originated by the concurrence of several declarations of will, the promise is constituted solely and exclusively by a single declaration of will.

c) Contract subject to suspensive condition.What decides the final effectiveness of the option contract is the will of the option holder, while in the contract subject to a suspensive condition it is a random fact external to the parties in which they cannot influence – for example, the granting of a mortgage or obtaining a favourable judgment in court – ( TS 5-6-09, EDJ 205327 ).

d) Contract subject to a suspensive term . There is also a formal contract, but, while in the option one of the parties reserves the right to give its consent, in the contract subject to a term, the effects of the contract are deferred until the arrival of a certain day -for example, it is agreed that the payment of the price is subject to the completion of an administrative procedure- ( TS 5-6-09, EDJ 205327 ).

e) Right of first refusal . In the case of an option, the buyer has a period of time to decide whether to make the purchase, and the grantor is awaiting the buyer’s decision . However, in the case of a right of first refusal, it is the buyer who is in a passive situation, waiting for the owner of the property to decide to sell it, at which time he may exercise his right and acquire the property, as he has a preferential right.

Furthermore, option and preemption are different because in the option the price is freely set by the parties, while in the preemption it is the price that a third party is willing to pay.

f) Pre-contract . The purchase option – configured as an independent contract or as part of another contract – cannot be confused with the pre-contract. While the former is a contract in itself – the celebration of the sale depends on the sole will of the option holder, but this is already fully configured in the purchase option contract – the essence of the so-called pre-contract, preliminary or preparatory contract, is to constitute a contract by virtue of which the parties are obliged to subsequently celebrate a new contract (the so-called definitive contract) that, for the moment, they do not want or cannot celebrate, so that the expressed contractual figure of the so-called pre-contract, graphically, consists of ” being obliged to oblige oneself ” ( AP Madrid 17-12-07, EDJ 372752 ).

Form of contract

(CC art.1279 and 1280)

The general principle governing the purchase option is freedom of form , with written form being convenient for the purposes of proof. However:

– when it is accessory to another main contract , in this case the lease of a property, for reasons of documentary unity, it must be in the same form as the contract of which it forms part;

– When the option is configured as an independent contract , the formal requirement of the definitive contract must be met;

– when it is registrable in the Property Registry (no. 370 ), the purchase option must be documented in a public deed.

Exercise of the purchase option

Shape

 The purchase option is exercised unilaterally by the option holder, without the need for further consent from the grantor.

The exercise of the option requires that, within the agreed period, the option holder expresses his decision to carry out the negotiated contract, notifying his will in this regard to the grantor ( TS 18-5-05, EDJ 76740 ).

The exercise of this right implies a concluded sale that does not require any subsequent activity by the parties to develop the contractual bases contained in the agreement. The future sale is fully configured and it depends on the option holder whether it is perfected or not ( AP Sta. Cruz de Tenerife 23-6-06, EDJ 265054 ).

The expression of the will of the option holder is sufficient to perfect the contract of sale which, from the moment it is known by the grantor, becomes firm, perfect, in a state of execution and binding on both parties, without the need for further acts ( TS 14-11-02, EDJ 49705 ) and without the need for any other activity for the option to be considered consummated ( TS 11-4-00, EDJ 5724 ; 18-5-05, EDJ 76740 ).

The sale is perfected even if neither the thing nor the price have been delivered, so that as regards the requirement of payment or deposit of the price, it is a condition, in principle not required for the valid exercise of the option, unless that is the contractual intention of the parties, expressed in a clear and definitive clause ( TS 3-2-92, EDJ 888 ).

In this sense, the agreement by which the effective exercise of the right of option is subject to the payment of the purchase price within the agreed period for its exercise is valid, in such a way that, after this period has elapsed without the price being paid, even if the grantor had become aware of the beneficiary’s declaration of will opting for the sale, the right of option would have expired, without the sale having been perfected ( TS 11-10-02, EDJ 39394 ; 6-7-01, EDJ 15262 ). However, this condition must be clearly agreed, because, if not, the exercise of the right of option to purchase cannot be understood to be subject to payment of the purchase price ( TS 20-5-05, EDJ 76754 ).

Clarifications

It is not possible to allege a possible alteration of the circumstances taken into account at the time of contracting with respect to the time in which the option must be exercised, thus differing from the pre-contract, since it is with the acceptance when the reciprocal obligations that must be required later with the birth and perfection of the sale are definitively fixed by the work of double consent, which in the case of the option holder is simply delayed or postponed to the term foreseen ( TS 9-2-85, EDJ 7150 ; 17-11-86, EDJ 7369 ).

Perfection of the sale

 Although it has been understood that this manifestation of will must necessarily be express ( AP Madrid 27-11-07, EDJ 310881 ). The majority thesis is that it can also be tacit, and this because there is no specific form to make it effective, so if one is agreed upon, it will be necessary to adhere to what has been agreed upon ( TS 22-9-93, EDJ 8160 ; 24-10-90, EDJ 9673 ; 23-12-91, EDJ 12230 ). The most commonly agreed upon method is the notarial deed.

The jurisprudence has opted for the receptive nature . The perfection of the sale occurs from the moment that the seller-grantor becomes aware of the unilateral declaration by which the option holder expresses his will to buy the item for the pre-established price ( TS 21-11-77, EDJ 319 ). Although it is sufficient for the option holder to be aware of the option holder’s declaration, without further ado, it is not at all necessary for him to show his agreement. Even in the event of opposing and categorically rejecting the option, the contract would be consummated.

It is the option holder who must prove receipt , since this will serve as the basis for his claim for recognition of the right to enter into the sales contract ( AP Madrid 27-11-07, EDJ 310881 ).

In this sense, it is not enough for the option holder to make the declaration within the period specified in the option contract for its exercise, but it is also essential that it reaches the knowledge of the option holder within said period. Otherwise, the option right is extinguished due to expiration ( TS 4-12-97, EDJ 9855 ; 16-10-97, EDJ 7495 ). However, the option holder’s declaration made within the period is valid if the reason for which the notification reaches the grantor after the deadline is attributable to the grantor himself. In this case, the option contract would be consummated, giving rise to the contract of sale, which would be perfected ( TS 22-12-92, EDJ 12725 ). This is confirmed by CC art.1262 .

Term of exercise

 The determination of a period for the exercise of the option is an essential requirement for the validity of the contract, since the parties cannot remain indefinitely bound by it ( TS 15-12-97, EDJ 9779 ).

Once the time specified in the contract for its exercise has elapsed, the right of option expires without the need for any judicial declaration , due to expiration and without its fulfillment being possible for the grantor to be required to do so ( AP Alicante 14-3-06, EDJ 98967 ). Since it is a period of expiration, it is not susceptible to interruption and, if applicable, this must be accepted ex officio by the court even if the grantor has not alleged it ( TS 14-2-97, EDJ 720 ; 21-3-98, EDJ 1405 ; 15-6-04, EDJ 62142 ).

The parties are free to set the period for exercising the option. In cases where they do not set any period , case law has indicated that the applicable period would be:

– the 5-year period – limitation period for personal actions – (TS 14-4-56; 22-6-79, EDJ 217);

– the one that corresponds, taking into account the will of the parties, the principles of good faith in the contract, business practices and other circumstances of the specific case.

When the call option is incorporated into a master contract , the term is the same as that of the master contract.

However, in the case of a lease with an option to purchase, the duration of the option may reach the entire term of the lease, but it necessarily expires in the event of an extension, tacit or legal, of the lease contract ( AP Jaén 3-4-03, EDJ 83110 ).

In this case, the term cannot be disregarded from the duration of the lease contract, it cannot be greater than it ( TS 22-6-78, EDJ 217 ).

Nothing prevents, on the contrary, that, once a period for the option has been agreed, a subsequent period may modify the one initially agreed.

On the other hand, there is no problem with the right to purchase option being subject to a suspensive or resolutory condition .

This period must be understood to be for the benefit of both parties, which means that it cannot be exercised early unless the parties have provided for this possibility in the contract ( TS 24-2-93, EDJ 1777 ).

Clarifications

If the period for exercising the option is not stated in the option contract and taking into account that such omission is not an obstacle to its effectiveness and validity , it must be set by the courts, although always at the request of one of the parties ( TS 18-5-93, EDJ 4671 ).

Effects on leasing

 Once the option has been exercised in the correct manner, the right to lease is extinguished by the meeting in the same person of the condition of tenant and owner ( TSJ Catalonia 20-11-95, EDJ 20531 ). A consolidation of rights occurs : if a tenant purchases the property that is the object of his lease, the latter is extinguished ( TS 16-5-78, EDJ 158 ; 23-6-91).

In principle, the moment of this extinction would be the one in which the option becomes effective. The exercise of the right of purchase option produces the immediate extinction of the lease, regardless of the way in which the sale is executed, the same is perfected although the granting of the public deed and the payment of part of the price are still pending for its full consummation ( AP Palencia 12-3-18, EDJ 62636 ).

However, the full acquisition of ownership over the property does not occur automatically, since, even if the purchase and sale has been perfected by the simple exercise of the option, the full acquisition of ownership by the buyer requires:

– payment of the price to complete the sale of the property; and – where applicable, delivery of the property as a result of the sale.

Only when these circumstances occur are the conditions of owner and tenant brought together in the same person and consequently the lease contract and the obligations derived from it, such as the payment of rent, for example, are extinguished ( AP Alicante 9-4-08, EDJ 83275 ).

However, on occasions the payment of rent has been understood to be incompatible with the exercise of the option ( AP Madrid 10-7-07, EDJ 180438 ).

Termination of the lease

In principle, if the right to purchase is in force, the occurrence of a cause for termination of the lease agreement, which may be non-payment of rent or unauthorized works, will terminate the right to purchase only if:

– the right to the option having been linked to the condition of tenant of the option holder, the lease has been terminated prior to the exercise of the option; or

– when the expiration of the option due to breach of the lease agreement has been expressly established in the contract.

If these circumstances do not occur, nothing prevents the option holder from exercising his right despite the breach of the lease contract.

Since this is an atypical contract, the agreement between the parties is of particular interest, as it will take precedence over the application of CC art . 1124. Until the purchase option is exercised, the contract operates as a mere simple lease.

The exercise of the resolutory action by the landlord owner does not prevent him from demanding payment of the rents accrued up to that moment for the use of the property (no. 9500 s. ).

Registration in the registry

(RH art.14 )

The purchase option contract or the express agreement or stipulation that determines it in another registrable contract, such as a lease, may be registered in the Property Registry, provided that, in addition to the circumstances necessary for registration, the following is stated:

• The express agreement of the parties for it to be registered.
• The price stipulated for the acquisition of the property, and, where applicable, the price agreed upon for granting the option.
• The period for exercising the option, which may not exceed 4 years.

Clarifications

1) The indeterminacy of the price , as well as its contradictory determination, means that we do not register the option in the Property Registry ( DGSJFP Resol 14-2-03 ; 24-4-03 ).

2) It is necessary to precisely identify the object of the option ( DGSJFP Resol 15-4-03 ).

Doctrine of the General Directorate of Legal Security and Public Faith

 In relation to the registration of the right of option, and applicable to the lease with option to purchase, the General Directorate of Registries and Notaries (currently, the General Directorate of Legal Security and Public Faith) has indicated the following:

• With the registration, by effect of the registry publicity, the right of option is imposed erga omnes, such that its existence affects or harms any purchaser after the registration of the right of option (DGRN Resol 8-6-98).

• The real right of option registered in the Property Registry implies a preferential right to acquire on the part of the option holder, rather than a prohibition to alienate. However, this does not prevent a prohibition to dispose from being agreed in the same contract . In these cases, the registration qualification must carefully distinguish the effects of the option from those of the prohibition agreed as annexed to it (DGRN Resol 13-12-55).

• Once the maximum authorized period of 4 years has been agreed upon as the duration of the option, the extension contract entered into before the deadline expires is registrable, if it is not given retroactive effect to the detriment of a third party ( DGRN Resol 30-9-87 ).

• Registration does not close the Registry , since the owner of a property granting an option right, even after registration, can transfer or encumber the property. In this case, the buyer acquires the property with the burden of the registered option ( DGRN Resol 30-1-06 ).

• The acquisition of the property by the option holder who has his right registered occurs free of the charges constituted by the grantor during the pending phase of the option and those prior to the option that were not registered – LH art.82 ; RH art.175.6 – ( DGRN Resol 30-7-90 ; DGSJFP Resol 18-5-11 ; 6-3-14 ).

• The registration in the Registry of the sale resulting from the exercise of the right of option cannot be hindered by an intermediate registration of another sale granted by the grantor. The entry of this sale must be cancelled in order to register that one. In order to proceed with the prior cancellation of an intermediate ownership entry, it must be reliably proven that the right of option has been exercised in full compliance with the terms in which it appears constituted. Once this is declared by a judgment, this is sufficient title for the cancellation of the intermediate sale, without the need for a specific judicial order ordering the cancellation – analogous application of RH art.175.6 – ( DGRN Resol 6-5-98 ).

• The cancellation of the registration of an option right does not occur by the mere passage of 4 years (by the procedure of RH art.353 ), but the entry continues to publish a right whose timely exercise or its exercise must be accredited extra-registrally. The successive acquirers of the option grantor – of ownership or limited rights – are exposed to the consequences of accrediting before the Registry that the option was exercised in a timely manner ( DGRN Resol 30-7-90 ; 12-3-09).

seizure note is made after the registration of a purchase option in the Property Registry , in order to cancel the seizure note, the option holder must prove the deposit of the sale price made available to the seller and all subsequent rights holders arising from it ( DGSJFP Resol 18-4-02 ; 11-6-02 ).