Tax Type
Recordation Tax
Description
Lease and Purchase Option Agreement
Topic
Documents Subject to Tax
Date Issued
06-10-1985
[Opinion - Virginia Attorney General: 1985 at 390]
REQUEST BY: Honorable J. H. Wood, Jr. Clerk, Circuit Court for Clarke County
OPINION BY: Gerald L. Baliles, Attorney General
OPINION:
You have asked for my opinion on three issues regarding the recordation of an instrument which is styled, "Lease and Purchase Option Agreement." Specifically, you ask (1) whether the instrument should be treated as an option contract or a sales contract; (2) whether the recordation tax should be based on the stated consideration or the purchase price; and (3) if the instrument is an option contract, whether it is proper not to credit the tax paid on the instrument toward the recordation tax required on the deed of conveyance if the option is exercised.
The instrument in question contains two separate agreements. One portion of the instrument is a lease for a term of two years. The other portion I construe to be an option contract. Each of these agreements is taxed separately although they are contained in the single instrument. See 1972-1973 Report of the Attorney General at 435.
None of your questions relates to that portion of the instrument concerning the lease agreement. As to the option contract contained in the agreement, it is a unilateral offer by the lessor to sell the land to the lessee within a limited time, the term of the lease. The agreement is binding on the owner-lessor only and does not become an absolute contract of sale until accepted by the lessee. Merely because the agreement outlines the terms of the potential contract of sale does not make it a valid contract of sale between the parties.
Section 58.1-807(A) of the Code of Virginia expressly states that "on every contract or memorandum . . . relating to real or personal property admitted to record, a recordation tax is hereby levied at the rate of 15c. on every $ 100 or fraction thereof of the consideration or value contracted for." (Emphasis added.) It is my opinion that the recordation tax should be based on the value of the option, not on the purchase price. This is supported by a prior Opinion of this Office. See 1951-1952 Report of the Attorney General at 162. The Opinion states, in pertinent part:
"The [option] . . . is unquestionably a contract relating to real property . . . . The question is what is 'the consideration or value contracted for . . . . 'If the instrument were a binding contract for the sale of the land, I would say that the tax should be based upon the value thereof . . . . But the instrument offered for recordation is not such a contract; it merely grants a right to purchase the land at a stated price. Certainly, a right to purchase property, which the grantee may never exercise, cannot be said to be as valuable as the property itself, and the value contracted for is not the value of the land itself because the land is not contracted for. The only thing contracted for is a right to purchase the land, which does not have to be exercised and may never be exercised.
Normally, I would say that in cases of options to purchase real estate the consideration or value contracted for is nominal, and it follows that the recordation tax would be nominal." (Emphasis in original.)
Given the conclusion that the instrument in question is an option agreement, you are correct in the belief that it would not be proper to credit the tax paid on the instrument toward the recordation tax required on the deed of conveyance arising out of the exercise of the option. In a prior Opinion, it was stated:
"The proper basis for the determination of the recordation tax on this option is the consideration paid for the option. If the person should exercise his rights under the option and purchase the property, then the recordation tax on the deed would be based on the consideration recited therein or the actual value of the property conveyed, whichever is the greater."
See 1967-1968 Report of the Attorney General at 283.
It is, therefore, my opinion that the instrument should be treated as an option to purchase agreement, the recordation tax should be based on the value of the option, and no credit should be allowed against the recordation taxes for recording the deed of conveyance in the event the option is later exercised to purchase the property.
Attorney General's Opinion