Options, Installment Contracts, Leases and Assignment

Option Contracts, Rights of First Refusal, and Rights of First Offer

An option contract is a unilateral agreement in which a property owner, called the optionor, promises to sell or lease real estate on specified terms if the other party, known as the optionee, chooses to exercise that right. Because the agreement is unilateral before exercise, the optionor is legally bound to honor the terms, while the optionee has no obligation to buy or lease the property. To make the optionor's promise binding, an option generally requires consideration. The requirements governing the form and sufficiency of this consideration vary under state law. Furthermore, unless the contract specifically states otherwise, option consideration is typically nonrefundable if the optionee decides not to exercise the option.

An option contract should state an ascertainable deadline for exercise; the legal effect of omitting a deadline varies by state law. If the optionee decides to exercise the option according to its terms, that act generally creates an enforceable purchase contract or lease, depending on the original agreement. For example, a prospective buyer might negotiate an option to purchase a parcel within six months. If that buyer exercises the option within the deadline, a binding purchase contract is formed; if the buyer lets the deadline pass without acting, the option expires and the optionor keeps the consideration.

An option differs fundamentally from a right of first refusal and a right of first offer. A right of first refusal gives its holder the contractual right to match an offer or purchase the property before the owner sells it to a third party. Unlike an option contract, a right of first refusal does not allow the holder to force a sale if the owner chooses not to sell. In addition, the purchase price and terms in a right of first refusal are typically determined by an outside third-party offer rather than established in advance. A right of first offer gives its holder the first opportunity to propose or consider purchase terms before the owner offers the property to others; the agreement may specify terms or a process for proposing them. Depending on state law and recording requirements, an option, a right of first refusal, or a memorandum of either may be recorded in the public records to provide constructive notice to third parties.