What is a contract option?

A contract option is a preferential and unilateral right which gives the person receiving it the ability to exercise a unique privilege. The most common type of privilege or “option” is the right to purchase something of value like real estate, or stock in a company or a partnership interest. The person giving the option is called the “grantor” and the person receiving the option is called the “holder.” These names change depending on the context of the contract. In a real estate lease agreement for instance, it would be “Landlord” and “Tenant”. Regardless of the names used, the important thing to remember is that the holder does not have an obligation to exercise the option. After all, that is what makes it an “option.” The grantor, however, has an obligation to accept the option if and when holder exercises it. This is what makes it a unilateral right. To protect the grantor, however, the option will have certain conditions that need to be met, such as what, when, how, and where the option must be exercised. For example, in the context of a commercial lease, the landlord might give the tenant an option to renew the lease 90 days (when) before the end of the lease by giving the landlord written notice (how) at landlord’s place of business (where) of its desire to renew the lease (what). In the context of a sale of a business interest, the company may give a vendor the option to buy a 25% interest in the company (what) for $25,000.00 (how much) after the vendor has earned the company $1,000,000.00 in total sales which must be exercised by vendor by giving written notice (how) to company within 60 days (when) of reaching the sales goal and delivering the $25,000.00 to the company president (where) not more than 14 days thereafter (when).

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