Option Contract Under Common Law: Everything You Need to Know
An option contract is an agreement between two parties that gives one party the right, but not the obligation, to buy or sell an asset at an agreed-upon price. This type of agreement is commonly used in real estate, finance, and other industries where the value of the underlying asset is subject to change.
Under common law, an option contract is considered a type of unilateral contract, meaning that only one party is bound to perform under the terms of the agreement. The party who holds the option, known as the optionee, has the right to exercise the option by either buying or selling the underlying asset at the agreed-upon price. The party who grants the option, known as the optionor, is not obligated to do anything other than honor their promise to sell or buy the asset if the optionee decides to exercise their right.
In order for an option contract to be valid under common law, it must meet a few specific requirements. First, the offer to grant the option must be clearly communicated to the optionee in writing. Second, the optionee must provide consideration in exchange for the right to buy or sell the asset. This consideration can take the form of a monetary payment, a promise to perform some other action, or some other type of benefit.
Once the option contract has been properly executed, the optionee has a certain amount of time to decide whether or not to exercise their right. This time period can vary depending on the terms of the agreement, but it is generally between 30 and 90 days. If the optionee decides not to exercise their right, the option contract expires and the optionor is no longer obligated to sell or buy the asset.
If the optionee does decide to exercise their right, they must provide notice to the optionor in writing. At that point, the optionor must sell or buy the asset at the agreed-upon price, regardless of the current market value of the asset. This can be a risky proposition for the optionor, as they may end up selling or buying the asset at a price that is significantly lower or higher than the current market value.
In conclusion, option contracts are a useful tool for managing risk and uncertainty in a variety of industries. Under common law, these contracts are considered unilateral, meaning that only one party is bound to perform under the terms of the agreement. In order for an option contract to be valid, it must meet certain requirements, including clear communication of the offer, consideration, and a specific time period for the optionee to exercise their right. If you`re considering using an option contract in your business, it`s important to work with an experienced legal professional who can help you navigate the complexities of this type of agreement.