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What are the recommended provisions for a Real Estate Option Agreement?

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Recommended Provisions for a Real Estate Option Agreement in Kenya

A real estate option agreement is a contract that gives a prospective buyer (the option holder) the right, but not the obligation, to purchase a property from the seller (the option grantor) within a specified period of time. This agreement is a valuable tool for both buyers and sellers in the Kenyan real estate market.

Introduction
Essential Provisions 2.1. Parties 2.2. Property Description 2.3. Option Price 2.4. Option Period 2.5. Option Fee 2.6. Exercise of the Option 2.7. Due Diligence Period 2.8. Conditions Precedent 2.9. Default and Termination 2.10. Governing Law and Dispute Resolution
Case Laws
Sample Real Estate Option Agreement
Conclusion
TLDR

Introduction

In Kenya, real estate option agreements are governed by the Law of Contract Act, Cap. 23 of the Laws of Kenya. This Act establishes the general principles of contract law, including the requirements for a valid contract, such as offer, acceptance, consideration, and intention to create legal relations.

Essential Provisions

A well-drafted real estate option agreement should include the following essential provisions:

2.1. Parties

The agreement should clearly identify the parties involved, including their full names, addresses, and contact information. This ensures that there is no ambiguity about who is bound by the agreement.

2.2. Property Description

The agreement should provide a detailed description of the property subject to the option, including its legal description, address, and any relevant physical characteristics. This description should be sufficiently specific to avoid any disputes about the property's identity.

2.3. Option Price

The agreement should state the price at which the option holder can purchase the property if they choose to exercise the option. This price should be fixed and not subject to change during the option period, unless otherwise agreed upon by the parties.

2.4. Option Period

The agreement should specify the duration of the option period, which is the time frame within which the option holder has the right to purchase the property. This period should be reasonable and allow the option holder sufficient time to conduct due diligence and make a decision.

2.5. Option Fee

The option holder typically pays an option fee to the option grantor in exchange for the right to purchase the property. This fee is a form of consideration for the option agreement and is usually non-refundable. The agreement should clearly state the amount of the option fee, the payment terms, and the consequences of non-payment.

2.6. Exercise of the Option

The agreement should outline the process for exercising the option, including the required notice period, the method of payment, and any other relevant procedures. It should also specify the consequences of failing to exercise the option within the specified time frame.

2.7. Due Diligence Period

The agreement may include a due diligence period, which allows the option holder to conduct investigations and inspections of the property to ensure that it meets their requirements. This period should be reasonable and allow the option holder sufficient time to complete their due diligence.

2.8. Conditions Precedent

The agreement may include conditions precedent, which are events or actions that must occur before the option holder can exercise the option. These conditions may include obtaining financing, obtaining necessary permits, or completing other specific requirements.

2.9. Default and Termination

The agreement should specify the circumstances under which either party may be considered in default of the agreement and the consequences of such default. It should also outline the process for terminating the agreement, including the required notice period and any applicable remedies.

2.10. Governing Law and Dispute Resolution

The agreement should specify the governing law that will apply to the agreement and the method for resolving any disputes that may arise. This provision ensures that the parties have a clear understanding of the legal framework that will govern their relationship.

Case Laws

Here are some relevant case laws in Kenya that illustrate the legal principles governing real estate option agreements:

Dina Management Limited v. The Standard Group Limited & Another (2019) eKLR
- This case involved a dispute over a real estate option agreement. The court held that an option agreement is a binding contract that creates a right in the option holder to purchase the property.
- The court also emphasized the importance of clear and unambiguous language in option agreements to avoid disputes.
Kenya Commercial Bank Limited v. Kiplagat & Another (2018) eKLR
- This case involved a dispute over the exercise of an option agreement. The court held that the option holder must comply with the terms of the agreement when exercising the option, including providing the required notice and making the necessary payments.
- The court also emphasized the importance of timeliness in exercising an option agreement.

Sample Real Estate Option Agreement

REAL ESTATE OPTION AGREEMENT

This Real Estate Option Agreement (the "Agreement") is made and entered into as of [Date], by and between [Option Grantor Full Name], residing at [Option Grantor Address] (the "Grantor"), and [Option Holder Full Name], residing at [Option Holder Address] (the "Holder").

WITNESSETH:

WHEREAS, Grantor is the owner of the real property located at [Property Address] (the "Property"); and

WHEREAS, Holder desires to obtain an option to purchase the Property from Grantor;

NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties agree as follows:

Grant of Option. Grantor hereby grants to Holder the exclusive option (the "Option") to purchase the Property on the terms and conditions set forth herein.
Property Description. The Property is described as follows: [Property Legal Description].
Option Price. The purchase price for the Property (the "Option Price") shall be [Option Price Amount] ([Currency]).
Option Period. The Option shall be exercisable for a period of [Option Period Duration] commencing on the date hereof (the "Option Period").
Option Fee. Holder shall pay to Grantor an option fee (the "Option Fee") of [Option Fee Amount] ([Currency]) upon the execution of this Agreement. The Option Fee shall be non-refundable.
Exercise of the Option. Holder may exercise the Option by delivering written notice to Grantor within the Option Period (the "Exercise Notice"). The Exercise Notice shall specify Holder's intention to purchase the Property at the Option Price.
Closing. Upon receipt of the Exercise Notice, the parties shall proceed to close the purchase of the Property within [Closing Period Duration] days (the "Closing"). The closing shall be conducted in accordance with the terms and conditions of a purchase agreement to be negotiated and executed by the parties (the "Purchase Agreement").
Due Diligence Period. Holder shall have a period of [Due Diligence Period Duration] days from the date hereof to conduct due diligence on the Property (the "Due Diligence Period"). During the Due Diligence Period, Holder shall have the right to inspect the Property and review all relevant documents relating to the Property.
Conditions Precedent. The exercise of the Option shall be subject to the following conditions precedent:

a. Holder shall obtain financing for the purchase of the Property on terms and conditions acceptable to Holder.

b. Holder shall obtain all necessary permits and approvals for the development of the Property.
Default and Termination. This Agreement may be terminated by either party upon the occurrence of the following events:

a. Failure of Holder to pay the Option Fee within [Option Fee Payment Period Duration] days of the execution of this Agreement.

b. Failure of Holder to exercise the Option within the Option Period.

c. Failure of Holder to satisfy any of the conditions precedent set forth in Section 9 hereof.
Governing Law and Dispute Resolution. This Agreement shall be governed by and construed in accordance with the laws of the Republic of Kenya. Any dispute arising out of or relating to this Agreement shall be settled by binding arbitration in Nairobi, Kenya, in accordance with the Arbitration Act, Cap. 4 of the Laws of Kenya.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

[Option Grantor Signature]

[Option Grantor Printed Name]

[Option Holder Signature]

[Option Holder Printed Name]

Conclusion

A real estate option agreement is a valuable tool for both buyers and sellers in the Kenyan real estate market. It provides flexibility and security for both parties, allowing the buyer to secure the right to purchase the property while giving the seller time to consider other offers.

TLDR

A real estate option agreement in Kenya gives a buyer the right, but not the obligation, to purchase a property from the seller within a specified period of time. The agreement should include provisions for the parties, property description, option price, option period, option fee, exercise of the option, due diligence period, conditions precedent, default and termination, and governing law and dispute resolution.

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