Option Contracts

An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor’s power to revoke an offer. An option contract has two elements: 1) the underlying contract which is not binding until accepted; and 2) the agreement to hold open to the optionee the opportunity to accept. In addition, an option contract requires consideration. If an option is not supported by consideration, it is considered an offer and not a contract.

Consideration is generally defined as something of value. It may consist of a promise to perform a desired act or a promise to refrain from doing an act that one is legally entitled to do. Consideration must have a value that can be objectively determined. A promise, for example, to make a gift or a promise of love or affection is not enforceable because of the subjective nature of the promise.

There are any number of variations concerning the terms and conditions that might be contained in an option agreement. For example, there are two contracts involved with the option to purchase real property: the option contract and the real estate sales contract. The option contract is a unilateral contract that requires the offeror to hold open the offer to enter into the sales contract. When the option contract is exercised, it will “ripen” into a sales contract. Thus, the consideration for the option contract is separate and distinct from the consideration for the real estate sales contract.

Please keep in mind that the above information is being provided for educational purposes only. It is not designed to be complete in all material respects. Thus, it should not be relied upon as legal or investment advice. If you have any questions concerning the contents of this post, please contact a qualified professional.

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