Real estate transactions in Singapore involve various legal documents that govern the buying and selling process. If you are home hunting in Singapore, one such document is the Option To Purchase agreement, also commonly known as OTP or an Option. The OTP plays a vital role in property transactions, offering potential buyers the exclusive opportunity to secure the property before committing to its purchase.
It is a legal agreement between the seller and buyer of a property, where the seller gives the buyer the option to buy the said property at a mutually agreed-upon price. In this article, we will delve into the details of the Option To Purchase document in Singapore, examining its purpose, key elements, rights and obligations, and the overall significance it holds in the property market.
What is an Option to Purchase (OTP)?
The Option To Purchase (OTP) is a legal agreement commonly used in property transactions in Singapore. It is a contract between the seller (vendor) and the prospective buyer (option holder). It is a common step for the seller and buyer to enter into a contract for the sale and purchase of a property. An OTP is issued by the seller to the buyer, granting the buyer the option to purchase the property at an agreed price.
Following the agreement on the price and other material terms and conditions of the sale, the buyer pays an option fee to the seller (typically 1% for private properties or between $1000 for HDB resale flats). The seller will then grant the buyer an exclusive right to exercise the option to purchase the property within certain days from the date of the OTP (typically 14 days for a private property or typically 21 calendar days in the case of HDB resale flats).
It is important to note that the seller cannot grant another OTP during the option period. Buyers usually take the time during option period to source for a favourable housing loan package. This option period is also commonly known as the cooling-off period for the buyer to decide if they want to exercise the option and proceed to purchase the property.
The OTP usually contains several essential information, including the details of the parties (names, identification numbers, contact details and addresses), the details of the property (address and purchase price), the option fee and option period, and any special conditions pertaining to the sale of the property (such as if the property is being sold vacant or with tenancy etc).
Option To Purchase
|Private Property||HDB Resale Flat|
|Granting the OTP||Granted by the Seller to the Buyer under mutually agreed terms and purchase price of the property. |
Your real estate agent will prepare the OTP for this transaction.
|You will need to apply for the HFE letter before getting an Option To Purchase (OTP) from the seller and when you submit your resale application.|
Your HFE letter will be valid for 6 months.
Read more on new HFE letter here.
|Option Fee||Typically, 1% of the purchase price to be paid to the Seller by the Buyer.|
*In the event, the Buyer does not exercise the Option, the Option Fee will be forfeited.
|Not more than $1000, to be paid to the Seller by the Buyer|
|Option Period||Typically, 14 days (negotiable) with the Option expiring at 4pm on the last day.||21 Calendar days|
|Exercising the Option||Pay the Seller the remaining 4% of the purchase price (totalling to 5%).|
Buyer to pay Buyer Stamp Duty (BSD) and/or Additional Buyer Stamp Duty (ABSD) if applicable within 14 days of exercising the Option.
|Buyer to pay $5000 (less initial Option Fee paid) to the Seller. |
|New Launch Projects|
|Issuing the OTP||The OTP is granted by the developer of the project when the buyer pays the booking fee (typically 5% of the purchase price). At this point, the buyer is certain that he/she intends to buy the unit.|
|Exercising the Option||The developer will send the Sale and Purchase Agreement (S&PA) to the buyer, who then has 3 weeks to sign it to exercise the OTP.|
– The Buyer’s Stamp Duty (and the Additional Buyer’s Stamp Duty, if applicable) is payable within 14 days of signing the S&PA
– The remaining 15% downpayment is payable within 8 weeks of signing the S&PA
*Purchasers who may require more time finalise the necessary arrangements – such as the sale of their existing property – before exercising the OTP may apply to the Controller of Housing to request for an extension of the OTP validity period (of up to 12 weeks from the OTP date)
Rights and Obligations of the Parties
Both the Buyer and the Seller have specific rights and obligations under the Option To Purchase. Some key points to note are:
- Buyer’s Rights and Obligations:
- Right to exclusive purchase: The buyer has the exclusive right to purchase the property within the option period.
- Obligation to exercise the option: The buyer must exercise the option to purchase within the agreed timeframe and provide the necessary documents and payment if he/she wishes to purchase the property.
- Seller’s Rights and Obligations:
- Obligation to sell: The seller is obliged to sell the property to the buyer at the agreed price if the buyer exercises the option within the stipulated timeframe.
- Right to retain the option fee: If the buyer fails to exercise the option within the agreed timeframe, the seller has the right to retain the option fee as compensation.
- The Seller is not allowed to grant another Option to another Buyer.
Is the OTP a legally binding contract?
Yes. An Option To Purchase is a legally binding contract. When an Option is issued in the normal course of event i.e. after negotiation and agreement on the price and other essential terms of the sale, the party intending to back out of the sale would unlikely succeed.
What happens if the Buyer does not exercise the OTP during the Option Period? Or if the Seller decides not to sell?
If the Seller decides not to sell the property after granting the Option To Purchase, he/she has to refund the Option Fee to the Buyer. Provided the Buyer is agreeable. More importantly, if the Buyer wishes to purchase the property, the Buyer can apply to Court for specific performance to compel to the other party to complete the transaction. In a recent case, a Seller, who has had a change of heart, was ordered by the Court to complete the sale after the Buyer had exercised the OTP.
Similarly, if the Buyer backs out of the purchase and decides not to exercise the Option, the Option Fee is forfeited to the seller.
The seller is free to grant another OTP upon the expiration of the existing OTP.
Other legal implications and considerations to note
Entering into an OTP is not a matter to be taken lightly and buyers and sellers should only sign the Option when they are absolutely certain of proceeding with the transaction. The OTP carries significant legal implications for both parties involved. It is crucial to consider certain factors to ensure a smooth and transparent transaction.
- Seek legal advice: Engaging a qualified real estate lawyer is highly recommended to understand the legal implications and to draft or review the OTP document.
- Financing and mortgage considerations: Buyers should secure their financing arrangements and be aware of the implications of the OTP on their mortgage applications. Depending on citizenship status and number of properties you may own, Buyers may need to pay ABSD. For example, a Singaporean Citizen buying his/her second residential property will be subjected to an ABSD rate of 20% (of purchase price) which needs to be paid within 14 days of exercising the Option.
- Property valuation: It is prudent for buyers to conduct a professional valuation of the property to ensure the agreed price is reasonable.
- Timeline management: Parties should adhere strictly to the agreed timeline to prevent any potential disputes or forfeitures.
The Option To Purchase (OTP) document is a vital component of property transactions in Singapore. It offers buyers an exclusive period to secure a property before committing to its purchase. By understanding the purpose, essential elements, rights, obligations, and legal considerations surrounding the OTP, buyers and sellers can navigate the property market with confidence. It is advisable to engage legal professionals and seek expert advice to ensure compliance with all legal requirements and protect one’s interests throughout the transaction process.
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