What Does an Option To Purchase Mean?

The public discourse generated by the recent decision in Downtown Investments Limited Vs Muwema & Co Advocates, has caused more controversy than it has settled, especially with regard to the concept of Option to purchase (OTP).The controversy is borne out of the courts’ decision to acknowledge exercise of the OTP by the firm at plot 50 Windsor Crescent, while upholding a subsequent fictitious rent claim and declining Downtowns obligation to conclude the sale transaction.

Many people are wondering what the rationale of the landlord offering the OTP to the tenant was, if the tenant was not supposed to automatically acquire the right to purchase the property after invoking the option. Some are concerned that the meaning of the word “Option”, which implies a power to choose that which is specifically granted, was derogated. Others are wondering where the binding nature of contracts stands with all this.

The above questions were not answered in the decision. Instead, the court erroneously treated the OTP like it were “a right of first refusal” or “pre-emption right”, where the landlord essentially gives the tenant the first chance to buy the property at the price he sets before offering it to a third party. In such a case, it is the landlord who triggers the option and he can’t be compelled to offer the property for sale.

Since the specific facts relating to the OTP in the case shall be subject to an appellate scrutiny, we shall not belabour them here. Suffice to note however that the contested judgement missed the bus when it failed to master any dexterity in dealing with the OTP concept. As far as Ugandan legal lexicon on the subject is concerned, the judgement should retain a limited decorative value.

The purpose of this Article therefore is to fill the gaping holes in the judgement in relation to the OTP, which like anything unfamiliar, has been blurred by a dearth of knowledge. This Article will navigate the origins of the concept, explain its features and legal effect while drawing from international jurisprudence and best practice.

Origin, Features and Legal Effect of OTP

As land began to gain value as a commercial asset, a need to allow a prospective purchaser to secure the right to buy property in the future without immediately committing to a binding sale, developed in 19th century England. This gave rise to the OTP contracts, which allowed one party to grant another a unilateral right to purchase property at a specified price within a defined period.

In the leading case of London & Southwestern Railway Company Vs Gomm (1881) 20 CH.562, Jessel M.R held that by granting an option, the grantor gives to another the power to deprive him of his legal estate at any time and by reason of this power, the grantee is clothed with an equitable interest in the property.

OTP rapidly gained international recognition in all countries using the Torrens land registration system. The concept of OTP became a part of Uganda’s legal system by virtue of the reception clause of the 1902 Order-In-Council which made the laws of England at the time, applicable in Uganda.

OTP is equitable in nature and it falls in the category of an unregistered interest in land in Uganda. OTP grants a caveatable interest to the option holder and it can be specifically enforced. In Kabiito Karamagi, Receiver Spencon Services Ltd & dfcu Bank vs Yanjian Uganda Company Ltd & Anor, Misc Application Number 1202/2021 at P.26, Mubiru J observed that rights entitling parties to specific performance such as an option to purchase, are caveatable.

The above decision is aligned with the Australian Supreme Court of Victoria decision in Saafin Constructions (pty) Ltd vs Vidak & Anor 2015 VSC 441 where Warren CJ held that an option to purchase is a caveatable interest.

Furthermore, an option grantor (land owner) can’t sell the property to a third party in order to defeat the option holder’s interest. Doing so results in a fraudulent conveyance which voids the whole transaction with the transferee.

The broader context of general contract law, places OTP as a future event which falls under the realm of contingent agreements provided under Part IV Contracts Act Cap 284, where executory consideration (a promise to provide value in the future), binds parties to future performance.

The contingency of the OTP is illustrated in Barnsleys land options, 2016 6th edition Sweet & Maxwel London by M.B.A. Dray & AJ. Rosenthal P.164. The learned authors state that on exercise of the option, a buyer/ seller relationship between the land owner and option holder comes into existence. In other words, the previous landlord-tenant relationship ceases and a future contingent relationship of Vendor/buyer is created where rent payments also cease.

However, if the tenant continues to pay rent after exercise of the OTP, it doesn’t invalidate it and such rent shall be adjusted against the purchase price. In the American case of Petrolink Inc. Vs Lantel Enterprises 21 Cal. App. 5th 375 and 81 Cal. App. 156 (March 15, 2018), the court of appeal of California held that Petrolink had validly exercised its option which in essence had terminated the lease. The court also ordered an offset of rent as a payment against the purchase price.

Consequently, there are two key features of an OTP. Firstly, it must be expressed in writing or orally and be made in respect of real or personal property i.e. land or chattels. Secondly, an OTP must make a clear and irrevocable offer to the tenant to purchase the property at a specified price within a defined period. Where the price is not specified in the contract, a mechanism for determining the price must be given e.g. using the market price.

In conclusion, OTPs have long been embraced in many jurisdictions as a convenient and beneficial tool for the marketing and Investment in land. Why shouldn’t Uganda embrace this development model?