An option is a contract by which an optionor (generally an Owner gives an optionee (a prospective purchaser or lessee) the right to buy or lease the Owner’s property at a fixed price within a certain period of time. The optionee pays a fee (agreed-on consideration) for this option right. The optionee has no other obligation until he decides to either exercise the option right or allow the option to expire. An option is enforceable by only one party – the optionee.
An option contract is NOT a sales contract or a lease. At the time the option is signed by the parties, the Owner does not sell or lease and the optionee does not buy or rent. The parties merely agree that the optionee has the right to buy or rent and the Owner is obligated to sell or lease if the optionee decides to exercise his right of option. Options must contain all the terms and provisions required for a valid contract.
The option agreement (which is a unilateral contract) requires that the optionor act only after the optionee gives notice that he elects to execute the option. If the option is not exercised within the time specified in the contract, both the optionor’s obligation and the optionee’s right expire. An option contract may provide for renewal, which often requires additional consideration. The optionee cannot recover the consideration paid for the option right. The contract may state whether the money paid for the option is to be applied to the purchase price or rent of the Real Estate if the option is exercised.
A common application of an option is a lease that includes an option for the Tenant to purchase the property, extend the lease, or perhaps lease additional or adjoining space. Options on commercial Real Estate frequently depend on some specific conditions being fulfilled, such as obtaining a zoning change or a building permit. The optionee may be obligated to exercise the option if the conditions are met.