Option contracts

     An option contract is a contract in which one party purchases time to consider whether or not to accept an offer.  Option contracts are common in, although not limited to, real estate transactions.  Consider, for example, the case of a developer hoping to construct a shopping mall on a parcel of real property owned by another.  Prior to constructing the shopping mall, the developer may need to secure approval from the city (e.g. a zoning variance, building permit), which in turn may require an environmental impact report and detailed architectural plans and drawings.  The developer may well be unwilling to purchase the real property absent the approval but wants the assurance that it can buy the real property at a pre-determined price if and when the approvals are secured.  To meet these needs, prior to embarking on the planning and approval process, the developer will attempt to negotiate an option contract with the owner of the real property under the terms of which the developer will pay the owner a sum for the right to acquire the property through exercise of an option to purchase within a stated period.  The option contract might provide, for example, that upon payment of $100,000 by the developer to the owner before January 10, 2002, the developer has the right to purchase the property for $5,000,000 by notifying the owner in writing, before December 1, 2002, of its election to purchase the property.  In addition the contract may specifying a variety of other terms for the purchase.  If the developer secures the needed approval, the developer's timely exercise of its option will accept the offer to sell and thus form a contract for the purchase of the real property on the terms (including $5,000,000) previously negotiated.  If the developer, for whatever reason, does not timely exercise its option, the offer to sell for $5,000,000 lapses and the owner of the real property keeps the $100,000.  In short, through the option contract the developer has purchased time to decide.   

     When parties enter an option contract, an offeree's power of acceptance is not terminated by rejection or revocation of the offer, by a counter-offer, or by death or incapacity of the offeror.  See R.2d Contracts 37.  For example, the owner in the illustration above might receive a better offer for the real property from someone else during the option period.  If the owner notifies the developer that the owner is revoking the offer to sell, the developer may nonetheless exercise the option to purchase by giving timely notice of its desire to do so.  If the owner refuses to convey the real property, the developer has a claim for breach of contract and may be entitled to a decree of specific performance.   Note that it is unlikely that the seller would have succeeded in selling the property to another, because the developer would likely have recorded the option contract in the county land records and a prospective buyer would have declined to purchase upon learning of the recorded option through a title search.  

     With some exceptions that we consider (e.g. UCC 2-205 and Drennan v. Star Paving Co.), an option is not enforceable unless purchased with money or other value.  In other words, an offeror's promise to hold an offer open (i.e. an offeror's promise not to revoke an offer) is not enforceable absent consideration.   Thus, absent consideration in support of the promise to hold an offer open, an offeree's power to accept an offer will be terminated by rejection or revocation of the offer, by a counter-offer, or by death or disability of the offeror.