THE JERUSALEM INSTITUTE OF JEWISH LAW
Rabbi Emanuel Quint, Dean

Lesson # 368 - (part 1) • Sell or Buy Option
Situations in which the demand is available
In this lesson and the next lesson we shall IY"H discuss a topic that many people have been involved in, a buy or sell option. When going into a business or buying a piece of property, the partners may feel that some day they may have a falling out or that someone will wish to retire from the business. If they have good lawyers, the lawyers will advise them to prepare themselves for many eventualities, including the buy or sell option.

If there is an agreement between the joint owners that they will not, for a certain period of time, make demands on the other to exercise the sell or buy option, it may not be demanded during that period. This agreement has to be made by kinyan for it to be binding. The demand is available only in situations where the parties are the joint owners of the land or the personal property and are not entitled as a matter of right to demand partition, either because the land is too small to permit one of the joint owners to demand partition as of right or because Beit Din determines, in the case of land or personal property, that it does not lend itself to partition. If Reuven and Shimon are joint lessees rather than owners, the majority opinion is that either party may make the demand that the other joint lessee either buy out his ownership in the lease or sell his ownership in the lease at a price fixed in the demand. The opposing opinion holds that the law of the sell or buy option does not apply to property not belonging to the parties and only rented by them. If Reuven and Shimon jointly hold a mortgage on Yehuda’s realty, or a promissory note showing that Yehuda owes them money, the sell or buy option does not exist, since they only have a right to money that is due from Yehuda. If Reuven and Shimon are mortgagees in possession, then their status is analogous to that of lessees making the demand.

Making the Demand
Reuven may make the demand, where there are two joint owners or multiple joint owners. Where there are multiple joint owners more than one joint owner can make the demand by demanding of the other joint owners that they sell their shares or buy the shares of the offerors. If two joint owners make the demand and then the others sell their shares to these two joint owners, one of these two can make a demand to the other of the sell or buy option. The demand must state a price for which Reuven is willing to sell his share to Shimon or to purchase Shimon’s share; then Shimon may either sell his share to Reuven at that price or buy Reuven’s share at that price. The price need not be the true value of the share. Reuven may set a price that is close to or the actual value of the share to be bought or purchased, or it may be much higher or much lower than the true price. There is early authority that the price should be the value or close to the value of the shares being sold or bought, and if the parties cannot agree on the true price, Beit Din will set the price. The demand must be for Shimon to either sell his share to Reuven or to buy Reuven’s share. The demand cannot be for Shimon to purchase Reuven’s share if it does not include Reuven’s reciprocal offer to purchase Shimon’s share. There is also an opinion that Reuven may make a demand that Shimon lease to him at a fixed rental or that Shimon rent from Reuven at that fixed rental. If the entire parcel jointly owned by Reuven and Shimon is less than 49 square feet (four amot by four amot), the law of demanding that the other joint owner sell or buy does not apply. There is also a dissent that holds that the law of demand applies even in this situation.

Payment by the Purchaser
When Shimon exercises his option, whether to sell or to buy, the purchaser must make immediate payment. If Reuven makes the demand to Shimon to exercise the option to sell or buy and Shimon exercises the option to buy, he may request that Beit Din grant him up to 30 days to make payment. If Shimon exercises the option to sell, Reuven must make immediate payment, since he should have anticipated that he may be called upon to purchase if Shimon exercises his option to sell. If Reuven does not pay, then his demand is voided and if he once again makes a demand Shimon can request that Beit Din ascertain whether or not Reuven has the money to purchase if Shimon decides to sell. If Reuven makes a demand by giving Shimon the option to purchase and by permitting Shimon to wait 30 days to make the payment to Reuven or Shimon can sell to Reuven and Reuven will wait 30 days to pay Shimon, the demand is not valid if Shimon can prove to Beit Din that Reuven will not be able to pay at the end of the 30 days.

When a demand cannot be paid
If Reuven does not have the money to purchase, he cannot make the demand to sell. This is true even if the price fixed by Reuven is a very low price so that there is incentive for Shimon to buy Reuven’s share. A situation may arise where Reuven is wealthy and Shimon is poor and Reuven will take advantage of the situation by making a demand with a very low price for the shares, knowing that Shimon cannot even pay such a low price and thus Shimon will have to sell to Reuven for the low price.

Shimon, if he is able, may borrow the money and buy Reuven’s shares. Most probably Reuven has ascertained that it is difficult for Shimon to borrow the money before Reuven made the demand. Or Shimon may sell his share to Levi, and then Levi can purchase Reuven’s shares for the low price that was included in Reuven’s demand. When Shimon sells his share to Levi it includes the sale of the right to exercise the option to sell or buy made by Reuven’s demand. For example, the land is worth $200 and thus the share of each joint owner is worth $100. Reuven makes a demand that Shimon purchase Reuven’s shares for $40 or sell his share to Reuven for $40. Reuven knows that Shimon does not have the $40. Shimon can sell his share to Levi for $100 and then Levi can exercise the option and purchase Reuven’s share for $40. Levi will own the $200 land for $140 and Shimon will not bear any loss. If Shimon is not able to borrow the money or is not able to sell his share to Levi then Shimon may go to Beit Din to have it establish a true price for the share. Then Shimon will exercise the option of selling his share to Reuven for its full price.

If both parties want to sell and neither wants to buy neither will make a demand; the parties may sell to a third party who offers the highest price for the combined shares of both Reuven and Shimon. If one of the parties has a relative or close friend who wants to purchase his shares both shares must still be sold as one package.

The subject matter of this lesson is more fully discussed In Volume 5, Chapter 171 of A Restatement of Rabbinic Civil Law by Emanuel Quint. Copies of all volumes can be purchased at local Judaica bookstores. Questions to quint@inter.net.il

[The Parshat Mishpatim Homepage]
[The TORAH tidbits Homepage] [How to use TORAH tidbits]
[About The OU/NCSY Israel Center] [About TORAH tidbits]
[www.ou.org]