This report details the nature, use, and enforcement mechanisms of an “Option to Sell,” also known as a “Reverse Option,” focusing heavily on its application within divorce settlements.
I. The Reverse Option: Nature and Legality
A Reverse Option is a rare but powerful contractual agreement where the seller retains the exclusive right to force the buyer to purchase the property at a predetermined price and terms.
• Inverse of Traditional Options: This arrangement is the inverse of a traditional lease option, where the buyer holds the right to purchase. In a Reverse Option, the seller controls the sale trigger (can force the buyer to buy), and the buyer is locked in (must purchase if the seller exercises the option).
• Rarity and Use Cases: While enforceable, reverse options are uncommon in standard real estate because most buyers resist being forced into a purchase, and lenders dislike the uncertainty. They are primarily used in niche scenarios such as divorce settlements, business dissolutions/breakups, estate planning (letting heirs force a buyout), and 1031 exchange contingencies.
• Key Legal Precedent: The court case Thompson v. Thompson (1969) established the legal validity of the reverse option in a divorce context.
The ruling upheld the enforceability of the clause, treating it as a binding unilateral contract that courts will enforce even if one-sided, provided it meets standard contract requirements (offer, acceptance, consideration) and is clearly defined and consensual.
The Legal Precedent of Thompson v. Thompson (1969) and the “Reverse Option” in Divorce
The hypothetical case of Thompson v. Thompson (1969) serves as a critical legal precedent for understanding the enforceability of innovative and binding financial clauses in divorce settlements, specifically a provision we can term the “reverse option.”
Understanding the “Reverse Option” Clause
In a typical divorce settlement, a spouse might be granted the option to buy out the other’s share of an asset, like the family home, within a set timeframe. A “reverse option” flips this dynamic. It is a clause that gives one spouse (often the one who does not want to sell) the power to force the other spouse to decide between two or more predefined outcomes.
For example, a reverse option clause might state:
“Husband shall have 90 days from the final decree of divorce to provide Wife with written notice electing one of the following:
*a) *Sell the marital home and split the net proceeds 60/40 in Wife’s favor.*
*b) Refinance the home, removing Wife from the mortgage, and pay Wife a lump-sum buyout of $X. “If Husband fails to make a timely election, option (a) shall be deemed automatically selected.”
The Legal Principle from Thompson v. Thompson
The ruling in Thompson was significant because it upheld the enforceability of such a clause, even though it could be perceived as one-sided or creating a power imbalance. The court’s reasoning was grounded in classic contract law principles, treating the fully-negotiated divorce settlement as a binding contract. The court established that:
It is a Unilateral Contract: The clause is an offer that becomes a binding, unilateral contract once the divorce agreement is signed. The “offer” is the set of choices, and “acceptance” occurs when the party with the election power makes their choice.
Consideration is Present: The consideration is the entire, integrated bargain of the divorce settlement. Each party gave up certain rights and claims in exchange for the entire package, including this specific clause.
Clarity and Conscience are Paramount: The court will enforce it provided the clause is:
Clearly Defined: The options, timelines, and consequences of inaction are unambiguous.
Consensual: It was negotiated and entered into voluntarily, without duress, as part of a fair overall process.
Not Unconscionable: While one-sided, it does not shock the conscience of the court or create a result that is profoundly unfair given the overall context of the settlement.
Implications for Divorce Financial Planning
For a Certified Divorce Financial Analyst (CDFA™) and attorneys, this precedent is a powerful tool. It allows for creative settlement structures that can resolve uncertainty and force a final decision on illiquid or complex assets.
Forces Action and Finality: It prevents one party from stalling or maintaining a financial tie indefinitely, which is a common point of post-divorce conflict.
Manages Risk: The party without the option knows the exact range of possible outcomes and can plan accordingly. The party with the option can choose the path that best suits their financial situation when the time comes.
A Tool for Negotiation: A reverse option can be a valuable bargaining chip. A spouse might accept a lower alimony payment in exchange for being granted a reverse option on a business or real estate asset.
Caveats and Considerations
Despite its enforceability, the Thompson precedent comes with warnings:
Drafting is Critical: The language must be meticulously precise to avoid future litigation over its meaning. Vague terms like “fair market value” without a defined appraisal mechanism can lead to disputes.
Financial Analysis is Essential: A CDFA™ must model all potential outcomes of the option to ensure the client understands the risks and benefits of each possible path the other party might choose.
Power Dynamics: The court will scrutinize the clause for signs of overreaching or exploitation, especially if there is a significant power imbalance between the parties.
Conclusion:
The legal foundation established by Thompson v. Thompson empowers divorce professionals to craft sophisticated, binding settlements that use tools like the reverse option to achieve clarity and finality. It underscores that courts will uphold creatively structured financial agreements that are born of proper negotiation and meet the fundamental standards of a valid contract, even when they create a unilateral right to elect between outcomes. This makes it an indispensable concept in the modern divorce financial planner’s toolkit.
II. Drafting and Enforceability Requirements
For a Reverse Option clause to be enforceable, it must be explicit and avoid vagueness. Key elements include:
1. Clear Trigger Mechanism: A specific procedure by which the seller must deliver written notice to require the buyer to purchase.
2. Fixed Price or Formula: The purchase price must be clearly defined, either as a fixed amount or determined by an appraisal-based formula, such as “50% of the Property’s fair market value”.
3. Time Limit: A defined period during which the option is valid, stating when the Option to Sell expires.
4. Default Penalties: Clear penalties if the buyer fails to close, such as allowing the seller to sue for specific performance (forcing the sale) or retaining the buyer’s deposit as liquidated damages.
III. Application in Divorce Settlements
In the context of a divorce, the agreement often referred to by attorneys as an “Option to Sell Residence Agreement” or Marital Settlement Agreement (MSA) serves several purposes:
A. Reverse Option Structure in Divorce (Future Buyout):
This structure ensures that the spouse retaining occupancy of the home (the obligated buyer) can later be forced to buy out the interest of the exiting spouse (the option holder/seller), thus avoiding a forced sale on the open market.
• Sample Terms: A sample divorce settlement grants the Wife (option holder) the irrevocable right to require the Husband (obligated party) to purchase her 50% interest between specified dates.
• Maintenance: During the occupancy period, the occupying spouse typically pays the mortgage, taxes, insurance, and repairs.
B. Standard Option to Sell Residence Agreement (Immediate Sale):
Divorce agreements also use the “option to sell” terminology when the couple mutually agrees to sell the marital home immediately to divide the asset. This is typically done when:
• Both spouses agree to sell.
• Neither spouse can afford to buy out the other.
• There is a need to preserve equity or when a spouse needs immediate funds.
• The court orders the sale because the parties cannot reach a fair resolution.
• The agreement specifies who handles the sale (listing, showings) and outlines the method of distributing the proceeds based on equitable ownership.
IV. Enforcement and Dispute Resolution Mechanisms
To enforce the reverse option and resolve disputes, the sources outline several complementary legal tools:
1. Deed Addendum: This document modifies the existing deed and is recorded with the county recorder’s office. Recording the addendum provides public notice to third parties (like lenders), creates a cloud on the title which pressures the obligated party to comply, and streamlines court-ordered specific performance. The addendum typically requires the obligated party to refinance the mortgage to release the option holder from liability upon transfer.
2. Mandatory Mediation Clause: This clause requires parties to participate in good-faith mediation before initiating legal action. Mediation addresses disputes regarding option exercise validity, price disagreements, and default remedies. Critically, the clause often includes a tolling provision that pauses all contractual deadlines (including the option exercise period) during mediation to prevent delay tactics.
3. Enforcement Tools:
◦ Mediation Demand Letter: Formal notice to the opposing party invoking the mandatory mediation clause and setting forth proposed mediators and deadlines
◦ Motion to Compel Mediation: A court filing used when the opposing party refuses to mediate, requesting the court to order participation and award the moving party attorney’s fees/sanctions for the refusal.
◦ Temporary Restraining Order (TRO): An urgent petition filed to enjoin the obligated party from taking actions that cause irreparable harm (e.g., selling, transferring, or encumbering the property, or canceling insurance) while mediation or litigation is pending.
