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 into 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. 

What are some Common Examples of Option Contracts?

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.  Thus the renting party is granted the “option” of either purchasing the home or renewing the lease, and the owner is usually prohibited from selling the property during the lease term. 

Other common examples of options include:

  • Option to Renew a Contract:  Contracts will often contain an option to renew the contract.  Options to renew are common for services that are rendered in a periodic manner, such as yearly subscriptions or athletic employment contracts.  Sometimes the purchasing party must pay for the renewal
  • Option to Keep an Offer Open:  In a sale of goods, sometimes the selling party will accept money in order to keep the offer open.  For example, suppose that a party has offered to sell their car for $1,000.  If the selling party accepts a $100 deposit from a buyer on Monday to keep the deal open until Friday, then an option contract has been formed.  The seller is obliged to keep the deal for $1,000 open until the agreed-upon Friday; if they sell the car to another buyer before then, they may be in breach of contract  

What does it mean to “Exercise” an Option?

The way that options work is that one party purchases rights that will be available at some later point in time in the future.  Once that time arrives, the party may then claim “exercises” their option, which means to claim the rights stated in the option.  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. 

What if an Option is not Exercised within the Required Time Frame?

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.

Do I Need a Lawyer for Option Contracts?

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 necessary.