Expiry of the period of limitation for option agreements

Property developers often enter into option agreements that provide the property developer with the right to buy real estate at a future date. Option agreements are flexible solutions that limit the risk on the part of the property developer. It is often a prerequisite that the right will apply for a prolonged period of time. However, what experience shows is that property developers often forget is that the option is subject to expiry of the period of limitation. This means that the right may be lost. It is therefore important to be aware of the rules set down in the Limitation Act and how the option agreement may be designed to avoid expiry of the period of limitation taking place before the property developer actually buys the property.

Pursuant to Section 1 of the Limitations Act, the act applies to “receivables on money or other benefits”. Preparatory work and case law assume that options are considered “other benefits” under the provision and are therefore subject to expiry of the period of limitation.

The period of limitation is three (3) years and is calculated from the earliest date on which the property developer is entitled to request fulfilment, cf. Section 3 cf. Section 2 of the Limitations Act. The option agreement entered into must form the basis for assessing when the period of limitation starts. In cases where the property developer has an unconditional right to exercise the option, the basis shall be that the period of limitation starts when the option is entered into. Unless the property developer can request that the option be redeemed, the period of limitation will not start and the option cannot expire.

If conditions have been agreed for the right to apply, the conditions taking effect will determine the start of the period of limitation. In these cases, the period of limitation will only start when the condition takes effect.

The property developer should also be aware that option agreements normally have an expiration date. In cases for which no expiry date has been agreed, the act concerning the right of redemption will apply. The act stipulates a maximum period of 25 years, cf. Section 6.

In order to avoid expiry of the period of limitation before the property developer buys the property, it is, therefore, if possible, a good idea to ensure that the option agreement is conditional upon e.g. zoning status and separation or other conditions that are essential to the property developer. In order to ensure that the property developer does not end up in a situation where the option expires before it can be declared, a condition should be included to stipulate that the option holder has the right to declare the option on the expiry date or just before, regardless of whether the condition has been met or not.

The lawyers in our real estate team have solid and extensive experience of both the design of option agreements and how best to avoid loss of rights under an option agreement.  Please do not hesitate to get in touch if you require advice in connection with this.