1. Common Law Option Contract
2. Difference Between an Option Contract and a Firm Offer
3. Importance of an Option Contract
3.1. Option Contracts For Investors
3.2. Option Contracts in Real Estate

Common Law Option Contract

A common law option contract is a relatively unknown and specifically utilized form of a contract that businesses use to buy and sell products. It provides a buyer with a specified period of time during which a product can be purchased at a stated price. A purchase option can be contained within the framework of a contract or exist as a separate document that serves as an addendum to an agreement.

There is no limit to the subjects over which a common law option contract can address. They cover everything from real estate to an agreement to enter into negotiations to renew the existing contract. It is essentially an agreement that sets the terms for two parties to enter into a contract to conduct business in the future.

They are legally enforceable although the laws governing their existence can vary from state to state or according to subject matter. However, as long as they contain the basic elements of a contract established by contract law, their validity will usually not be in doubt.

Difference Between an Option Contract and a Firm Offer

There is often a little confusion as to the difference between an option contract and a firm offer. After all, both concern a promise to take an action at some future date. However, what sets an option contract apart from a firm offer is that some form of consideration must be given by the purchaser in order for the guarantee from the seller to keep the option to complete the purchase open until an agreed upon future date.

There are several elements that make an option contract unique:

  • The seller agrees not to raise the price being offered for the goods over the term of the option contract. They also may not rescind the offer should a better one come along.
  • The purchaser gives something as compensation to the seller, who bargains away their right to offer the goods or provide services to another party during the term of the contract.
  • The purchaser is under no obligation to actually purchase the goods or services that they hold the option for. The option contract is essentially only an agreement to enter into another contract should the purchase wish to exercise their option.

Importance of an Option Contract

Great care should be taken when drafting a common law option contract, and it is advisable to seek the help of an attorney experienced in contract law. They should always be in writing because at their most basic form they are the promise of one party to take an agreed upon action in the future, and over time, misunderstandings can arise as the original terms and intent of the agreement. Creating a document that contains the signatures of both parties indicates that an agreement has been reached and compensation has changed hands, therefore giving the parties legal standing in a court of law.

There are two markets where option contracts can prove beneficial to both the buyer and the seller.

Option Contracts For Investors

They are commonly found in the financial services industry. Investors favor the flexibility offered by option contracts because they operate in an environment where stock prices can fluctuate widely over the course of days and sometimes even hours. If an investor seeks stock in a company that he or she thinks is a bargain, but wants a little time to do some research into the company and gain a greater understanding of factors that influence the company’s market, a contract option makes sense. The investor locks into a price. If stock prices rise, the investor can purchase the shares at the locked in price before it went up. If the stock drops in price, the investor is under no obligation to essentially overpay for shares in the company.

Option Contracts in Real Estate

Option contracts play an important role in real estate transactions. There is usually a period of time between when a homeowner agrees to sell a property and the buyer can have the property inspected and arrange for financing. With an option contract, the seller knows the price they will get and receives a deposit, while the buyer knows that the price will not change. If the buyer cannot get financing in place or problems arise during the inspection, they can back out of the sale.

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