Concept and Definition of an Option
An option, or option contract, is a preparatory contract. It grants one party, known as the optionee, the right or power to enter into a principal contract within a fixed period and under specified conditions. Its purpose is to give the optionee the opportunity to decide whether or not to enter into the principal contract.
Nature and Distinction
An option is an independent contract. It is distinct from the principal contract contemplated, such as a contract of sale. It is also distinct from a right of first refusal, which is merely a contractual right to have the first opportunity to buy a property.
Consideration for Option
A separate consideration is required to support an option contract. This consideration may be monetary or something else of value. If an option is not supported by a separate consideration, it may not be binding as an option contract. Consideration for the option contract itself is called option money. Option money is distinct from earnest money, which is part of the purchase price for a contract of sale and serves as proof of its perfection.
Effect of Option
Until the option is perfected, it does not serve as an independent source of obligation, except for establishing a binding juridical relation. When the optionee accepts the offer within the agreed period, provided it is supported by separate consideration, the option becomes a binding contract. The offeror cannot withdraw the offer during the period agreed upon if the option is supported by consideration.