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Demystifying the Option to Purchase for Resale Private Property– Should We all use Sale & Purchase Agreements Instead? Or are they the Same?

Fortis Law Corporation

Your Key to Quality Legal Solutions

发布日期: 2023年5月18日

As anyone who has purchased a resale private property in Singapore before be familiar with (as this author’s friends in their late 20s and early 30s increasingly are), it is almost taken for granted that a buyer would exchange a cheque (usually for an option fee equivalent to 1% of the purchase price) for the Option to Purchase (“OTP”) issued by the seller.?

The buyer would then, within the option period (usually 14 days), submit the duly signed OTP accompanied with a cheque or cashier’s order for the exercise fee (usually 4% of the purchase price) in order to “exercise” the OTP.?

The above reflects prevailing market practice for resale private real estate transactions in Singapore. This then begs the question – why are OTPs so commonly used in resale real estate transactions? Why do parties not simply dive straight into signing a Sale & Purchase Agreement? This article sets out to demystify the uses of the OTP.?

Buyer or Seller Needs a Longer Option Period

OTPs in resale transactions are bespoke documents, and the terms of an OTP can (and really should be!) specifically negotiated and crafted to reflect parties’ intentions. In some cases, a buyer may need a longer option period to exercise the OTP as he may be in the midst of disposing off his existing residential property.?

As Buyer’s Stamp Duty (“BSD”) is payable within 14 days of executing an OTP (if executed in Singapore), some buyers who are keen to purchase a particular private (residential) property may wish to have a longer period for executing an OTP so as to allow him or her adequate time to sell his existing residential property, so as to ensure that he does not incur Additional Buyer’s Stamp Duty (“ABSD”) (assuming the buyer is a Singapore Citizen) in his purchase of the new residential property.?

On the converse side of the equation, a seller may wish to secure a sincere buyer who is keen on purchasing his property, but he may need the buyer only to exercise the OTP after a certain date so that the sale takes place after the seller’s holding period. Seller’s Stamp Duty (“SSD”) is payable by a seller who sells within 3 years of acquiring a residential property, thus a seller who is approaching the 3-year mark may sometimes wish to specify that a buyer may only exercise the OTP after a certain calendar date.?

The Buyer Wishes to Reserve a Property While Keeping Options Open

Some buyers, especially well-heeled ones, may wish to purchase an OTP as this gives them the exclusive right, although not an obligation, to purchase a particular property. This purchase of the OTP by payment of the option fee locks the seller in, ensuring that the seller may not resell the particular property for the duration of the option period.?

The buyer may then take his time, for as long as the option period lasts, to “shop around” and compare various properties before finally deciding on and committing to purchasing a particular property. If the buyer ultimately decides that he likes the property, he can then exercise the OTP and this would then constitute a binding agreement for the sale and purchase of the property. Otherwise, he can always decline to exercise the OTP, as long as he is willing to forfeit or forgo the option fee paid.?

The Buyer is Considering Assigning the Option to Third Party

In yet other cases, some prospective buyers may consider assigning the OTP to a third party, such a spouse, a family member, or even to himself as a trustee for a beneficiary (such as a minor child). In such cases, it is imperative that the OTP be issued to [NAME OF PERSON] AND/OR NOMINEE(S). This would then give the prospective buyer the liberty to assign the OTP to someone else, or to himself as a trustee for a beneficiary.?

In cases where one has decided to buy a property in trust for a beneficiary, it may also be necessary to negotiate a longer option period to allow the prospective buyer to seek adjudication from the Inland Revenue of Singapore (“IRAS”), to obtain confirmation that the intended trust would qualify for ABSD (Trust) remission.?

The Buyer is Awaiting Approval for Financing

Sometimes, a prospective buyer may be awaiting a bank or financial institution’s approval regarding his or her loan eligibility. The buyer may have obtained an OTP and be awaiting the financial institution’s approval for the buyer to obtain his or her loan. Depending on whether a loan is ultimately granted or not, the buyer may then accordingly decide whether or not to exercise the OTP.?

In this author’s view, if none of the above 4 scenarios above apply, and buyers have firmed up their decision to purchase a particular property – the use of a sale and purchase agreement may be more appropriate instead. If a buyer is keen and has firmly decided to purchase a property, there is really no need for having double steps to first buy an OTP and subsequently exercise an OTP. The buyer and seller can simply ink and sign a sale and purchase agreement to lock both parties into the transaction instantaneously. This is of course subject to the usual due diligence on the property already having been done, such that the buyer is able to dive straight into signing a binding sale and purchase agreement.??

This article does not constitute legal advice. For enquiries on conveyancing and real estate matters (including negotiation of terms of the OTP or of the sale and purchase agreements, or on buying properties on trust), please do not hesitate to reach out to us.?