What Is an Option Contract?

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An option is basically a contract to purchase rights at a set time, for a stated price. Options may be contained within a more general contract or they can sometimes be formed as a separate agreement. Basically, an option contract is a contract that allows the parties to enter what is an option contract in contract law another contract in the future.

Option contracts can cover a wide variety of subject matters. For example, an option may deal with the right to purchase property, or it can provide a party with the right to renew a contract. Agreements that are formalized into an option are governed by contract law, and are legally enforceable so long as they follow the requirements for a valid contract. The laws governing options may vary according to state and according to the subject matter of the agreement.

The most common form of option contract is a lease option contract in a real estate transaction. This form of lease agreement allows a person to rent a residential property such as a home, and then buy it once the lease expires. The way that options work is that one party purchases rights that will be available at some later point in time in the future. For example, in a lease option, the renter may exercise their option to purchase the property only after the lease term has been completed.

In order exercise an option, a party must usually give formal notice in writing that they will be exercising their option. If there are any outstanding payments to be made, these should be rendered along with the written statement.

The written contract agreement for the option will usually state when the option can be exercised, and a deadline for when it must be exercised. If an option is not exercised within the stated time period, then the purchasing party will have forfeited their rights to the option. They will then not be able to claim their option rights, and will likely not be able to recover any payments that they made on the option. On the other hand, if a party has properly exercised an option, and the selling party refuses to transfer the property or services, then the selling party may be held liable under contract laws.

Since options are contracts, they are legally enforceable and subject to the various remedies for breach of contract. Like any contract, it is best if an option is drafted and reviewed by a competent contracts lawyer. Although options may be agreed upon orally, it is highly advisable to memorialize the agreement in writing so as to avoid future misunderstandings. A contracts attorney can help provide advice before creating or signing an option.

Also, your attorney can help you resolve any disputes in court if what is an option contract in contract law.

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An option contract , or simply option , is defined as "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 is a type of contract that protects an offeree from an offeror's ability to revoke their offer to engage in a contract. Consideration for the option contract is still required as it is still a form of contract, cf.

Typically, an offeree can provide consideration for the option contract by paying money for the contract or by providing value in some other form such as by rendering other performance or forbearance. See consideration for more information. An option is the right to convey a piece of property. The person granting the option is called the optionor [1] or more usually, the grantor and the person who has the benefit of the option is called the optionee or more usually, the beneficiary.

Because options amount to dispositions of future property, in common law countries they are normally subject to the rule against perpetuities and must be exercised within the time limits prescribed by law. In relation to certain types of asset principally land , in many countries an option must be registered in order to be binding on a third party. The option contract provides an important role in unilateral contracts.

In unilateral contracts, the promisor seeks acceptance by performance from the promisee. In this scenario, the classical contract view was that a contract is not formed until the performance that the promisor seeks is completely performed. This is because the consideration for the contract was the performance of the promisee. Once the promisee performed completely, consideration is satisfied and a contract is formed and only the promisor is bound to his promise.

A problem arises with unilateral contracts because of the late formation of the contract. With classical unilateral contracts, a promisor can revoke his offer for the contract at any point prior to the promisee's complete performance. The promisor has maximum protection and the promisee has maximum risk in this scenario.

An option contract can provide some security to the promisee in the above scenario. The promisor impliedly promises not to revoke the offer and the promisee impliedly promises to furnish complete performance, but as the name suggests, the promisee still retains the "option" of not completing performance.

The consideration for this option contract is discussed in comment d of the above cited section. Basically, the consideration is provided by the promisee's beginning of performance. Case law differs from jurisdiction to jurisdiction, but an option contract can either be implicitly created instantaneously at the beginning of performance the Restatement view or after some "substantial performance.

It has been hypothesized that option contracts could help allow free market roads to be constructed without resorting to eminent domain , as the road company could make option contracts with many landowners, and eventually consummate the purchase of parcels comprising the contiguous route needed to build the road.

It is a general principle of contract law that an offer cannot be assigned by the recipient of the offer to another party. However, an option contract can be sold unless it provides otherwise , allowing the buyer of the option to step into the shoes of the original offeree and accept the offer to which the option pertains.

In economics, option contracts play an important role in the field of contract theory. In particular, Oliver Hart , p. From Wikipedia, the free encyclopedia. The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject.

You may improve this article , discuss the issue on the talk page , or create a new article , as appropriate. December Learn how and when to remove this template message. Competition, Entrepreneurship, and the Future of Roads. Perillo, The Law of Contracts , p. Firms, contracts, and financial structure. Journal of Law, Economics, and Organization. Where do We Stand? Games and Economic Behavior.

Quarterly Journal of Economics. Retrieved from " https: Articles with limited geographic scope from December USA-centric. Views Read Edit View history. This page was last edited on 30 March , at By using this site, you agree to the Terms of Use and Privacy Policy.

Part of the common law series. Offer and acceptance Posting rule Mirror image rule Invitation to treat Firm offer Consideration Implication-in-fact Collateral contract. Parol evidence rule Contract of adhesion Integration clause Contra proferentem. Privity of contract Assignment Delegation Novation Third-party beneficiary.

Specific performance Liquidated damages Penal damages Rescission. Promissory estoppel Quantum meruit. Conflict of laws Commercial law. Tort law Property law Wills , trusts , and estates Criminal law Evidence.