OfflineI have been getting calls concerning Option Contracts so I thought I would address this issue for some of you in the DG world.
An option contract 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." Restatement (Second) of Contracts ยง 25 (1981).
An option contract is a type of contract that protects an offeree from an offeror's ability to revoke the contract.
Consideration for the option contract is still required as it is still a form of contract. 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.
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. So, if a promisee provides 99% of the performance sought, the promisor could then revoke without any remedy for the promisee. 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.[1] Essentially, once a promisee begins performance, an option contract is implicitly created between the promisor and the promisee. 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." Cook v. Coldwell Banker/Frank Laiben Realty Co., 967 S.W.2d 654 (Mo. App. 1998).
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.
Randy Bailiff
Dean Graziosi Real Estate Investment Coach
I'm SO SICK AND TIRED (ad nauseum) of everyone and their grandmother getting hung up, mixed up, and plain just screwed up, from worrying about the law, letting others LIE to them about what the law is (agents and brokers are NOTORIOUS for this), and people who are too cheap to hire an attorney (plus too scared to talk to one) letting legal terms and conditions be an excuse in their REI careers, killing their dreams before they even land a deal or look at a single house. Let this start a new trend here on DG.com -- the end of the insanity!
2nd Restatement of Contracts - Don't know what that is? I'll TELL you (again), it's the rule book when it comes to Contract Law. I'll rephrase that, it's the BIBLE when it comes to Contract Law. Short story is, there are things more powerful in this country than laws. One of them are RULES. It applies to ALL U.S. states and territories, no exceptions. This is one of about a dozen 20 pound tomes we were repeatedly beaten with in law school until you had it memorized, and then you were beat with it some more, LOL. Not really, but not that different from the truth, either. Using "promisor/ee" will confuse people who know about Promissory Notes, and you should've thrown in the definition of contract in there Randy, but no big deal. These are not from 2nd Restatement, but they mean the same thing:
CONTRACT - An agreement between at least 2 parties to do or not do something. All contracts require three things:
1) The OFFER - Someone proposes the agreement to a 2nd party.
2) The ACCEPTANCE - 2nd party accepts the offer.
3) The CONSIDERATION - It can be any physical object, or the promise to do or not do something, AS LONG AS it's worth AT LEAST $1 U.S.
When you have an OPTION to do or not do something, the power is UNILATERAL (one sided). Only the optionee has the power to exercise his option. Normally, the optionor's power rests entirely in the conditions of the option, which were already laid out and agreed to in writing. An option has nearly all the bells and whistles of a contract, and the legally binding power of one, but it's STILL different, for the reasons already mentioned.
Now that you know what the law (I mean, the RULE) is, go find an attorney you like, and start knocking down deals! That's what I'll be doing. Best of luck to everyone...
P.S.: The free market road hypothesis is interesting, but impossible. The companies could option the land of course (it's a free country, LOL), but all U.S. counties are incorporated. Part of that means no passenger-grade (county maintained) roads or railroads can be constructed without their permission. The best they could hope for would be a 2-track that's impassable in winter, floods out in summer, and won't be maintained by local government.
Paul: "I must not fear. Fear is the mind-killer. Fear is the little-death that brings total obliteration. I will face my fear. I will permit it to pass over me and through me. And when my fear is gone I will turn and face fear's path, and only I will remain."
Duke Leto: "I'll miss the sea, but a person needs new experiences. They jar something deep inside, allowing him to grow. Without change something sleeps inside us, and seldom awakens. The sleeper must awaken." - "Dune."