What is an option contract on land?
An option contract on land sells a buyer the right, but not the obligation, to buy a tract on set terms within a set time. In Virginia, an option and any memorandum, renewal or extension of it is void as to purchasers for value without notice who are not parties, and as to lien creditors, until recorded where the land lies, so recording is the point to check.
The holder pays for a right to buy, and the owner agrees to keep the deal open
The person who takes an option on a tract is not buying the land yet. The money paid is for something narrower: a promise that, for a stated period, the land can be bought at a stated price on stated terms, if and when the holder decides to buy.
Virginia's Code describes that bargain in one place, the definition of an option payment in the Residential Executory Real Estate Contracts Act: an amount paid "in exchange for the right to purchase the property that is the subject of such contract at a specific price within a specified time." That Act concerns a purchaser who occupies or intends to occupy the property as a primary residence, a different setting from a development tract, and lease-option and rent-to-own arrangements on a residence are covered under what a land contract is. Outside that Act the definition is not the governing rule, but its words describe the same bargain.
The two sides give up different things. The holder is not obligated to buy; if the term runs out without an exercise, the holder simply does not buy. The owner, for the length of the term, has promised this one buyer the chance to take the land on terms fixed today, and that promise is what the holder paid for. The short definition is in the glossary entry for option contract.
Who may prepare the option, and the writing rule behind the sale it leads to
An option exists to lead to a sale of real estate, and Virginia's writing rule for that sale is strict.
That rule, Va. Code 11-2, is covered with the other papers of a sale in what documents you need to sell land. Whether it reaches the option itself, how the option must be exercised, and what notice counts as an exercise are questions of enforceability, and those are an attorney's to answer.
People sometimes assume only a lawyer may put an option on paper. Virginia lets a real estate licensee prepare one within the limits of Va. Code 54.1-2101.1, set out in the option contract entry linked above. That is what the statute permits; an option on a development tract, with its term, fee and exercise mechanics, is the kind of document whose legal effect belongs with the parties' attorneys.
Until it is recorded, an option is void as to purchasers for value without notice and lien creditors
Virginia has a statute written for options specifically, and it is about recording.
Any option to purchase real estate, and any memorandum, renewal, or extension of such option, shall be void as to (i) all purchasers for valuable consideration without notice who are not parties to such instrument and (ii) lien creditors, until such instrument is recorded in the county or city in which the property embraced in the option, memorandum, renewal, or extension is located.
Va. Code 55.1-315
Three details in that sentence matter to a holder. It reaches renewals and extensions, not just the original option, so a term that is stretched needs the same attention. It protects purchasers for value without notice who are not parties to the option, and lien creditors. And it points to recording in the county or city where the land lies. Va. Code 55.1-407 treats written contracts generally the same way, and under that section being on the land does not, by itself, give a later buyer notice.
The practical reason is the title search. A later buyer's search of the land records can turn up a recorded option or memorandum. It has no way to find one that was never recorded. How and what to record, the full option or a memorandum, is a decision for the parties' attorneys, and the recording itself happens at the circuit court clerk's office that records deeds for that land.
An option buys a developer time to find out whether the plan can be approved
On development land, the reason to pay for an option instead of buying outright is uncertainty. The price a developer can pay depends on what the tract can be approved for, and that is not known on the day the option is signed.
A holder can use the term to test the approvals the purchase depends on. Those approvals and their status are what people mean by entitlements, and the rules they run through, from the plat to the land disturbance approval, are set out on the land development and feasibility page.
What the holder learns in that time feeds straight into the price, which is the subject of how developers decide what to pay for land. A holder who concludes the tract will not carry the plan can let the option lapse and never take the deed. For commercial ground, a long-term lease of the land is another way to control a site without buying it, covered in what a ground lease is.
Before granting an option, the owner decides how long to wait and on what terms
An owner asked for an option is being asked to hold the land for someone else. The decision turns on a handful of terms, and each of them is the contract's to set.
- The term. How long the land is held, and whether it can be renewed or extended. Any renewal or extension falls under the same recording statute as the option.
- The price and the terms of the sale. Fixed now, for a purchase that may come much later.
- The option fee. What is paid for the right, whether it is credited toward the price on exercise, and what happens to it if the holder walks away. That is a contract term for the attorneys.
- Access during the term. Whether the holder may enter for surveys, soil work and studies, and who restores the ground afterward.
- The end of the record. If the option is recorded and never exercised, how the land records will show that it ended. That is worth raising with the attorney at the start.
- How it compares with a sale. A purchase contract commits both sides to a sale on its terms and conditions; an option leaves the choice to buy with the holder. A land contract is different again, with the price paid over time and the deed delivered later.
Approached about an option on development land you own?
Tell Lowell about the tract and the proposal. He can give you an opinion of value on the tract as it sits, and the option's terms, recording and tax effect stay with your attorney and CPA. No cost, no obligation.
Got it. Thank you.
We'll be in touch shortly with an honest read.
Questions this raises
Is an unrecorded option still binding between the owner and the holder?
Va. Code 55.1-315 answers a narrower question. It makes an unrecorded option, and any memorandum, renewal or extension of it, void as to purchasers for value without notice who are not parties to it and as to lien creditors. It does not speak in those words about the owner and the holder themselves, so their rights against each other are a question for an attorney.
Does a renewal or extension of an option have to be recorded too?
The recording statute reaches them by name. Va. Code 55.1-315 applies to any option to purchase real estate and to any memorandum, renewal or extension of it, so a term that is stretched carries the same exposure as the original until it is recorded where the land lies. Whether to record the full document or a memorandum is for the parties' attorneys.
Does granting an option count as selling the land for IRS reporting?
Not by itself under the Form 1099-S rules. The IRS instructions say the form reports sales or exchanges of ownership interests in real estate, including improved or unimproved land, and that an ownership interest does not include any option to acquire real estate. How the option fee is taxed to the owner is a separate question for a CPA.
Where this page's facts come from
Every rule, office and figure above traces to one of these. Rules change; check the office before you act on one.
- Va. Code 55.1-315, recording options to purchase real estate Virginia General Assembly
- Va. Code 55.1-407, recording and purchasers for value without notice Virginia General Assembly
- Va. Code 11-2, contracts that must be in writing Virginia General Assembly
- Va. Code 54.1-2101.1, licensees preparing contracts Virginia General Assembly
- Va. Code 55.1-3000, definition of option payment Virginia General Assembly
- Instructions for Form 1099-S Internal Revenue Service