What is an Option?
“An option is a contract by which the owner of property invests another with the exclusive right to purchase said property at a stipulated sum within a limited or reasonable time in the future.” Nattress & Associates v. Cidco (1986) 184 Cal.App.3d 55, 66. Donald Trump used an option to purchase the Hotel Commodore at Grand Central Terminal, his ground breaking first deal at 27 years old. More commonly, options are used in leases in which the landlord gives the tenant an option to buy the property.
For example, the AIR Option to Purchase form provides that the lessee must provide written notice within a certain time period (i.e., April 1, 2004 to April 30, 2006), with the option expiring at the end of the option period. The form also sets forth the price, the escrow agent, a time period in which to close the sale and other instructions. After exercising an option, the parties should then enter into a Purchase & Sale Agreement, which addresses in more detail all of the minutiae of the sale transaction.
An Option is Irrevocable.
An option supported by consideration (even $1) is an irrevocable offer, open for a prescribed period. The acceptance must be in accordance with the terms of the option agreement and must be free of conditions which the optionor is not bound to perform. Riverside Fence Co. v. Novak (1969) 273 Cal.App.2d 656, 660. The exercise of an option is merely the communicated election of the optionee to accept the option. Id. at 661. It is important to recognize that, in terms of the formation of a contract, an option is a contract. Therefore, the “offer” (option) is truly irrevocable and merely awaits acceptance.
A Qualified or Conditional Acceptance
What is the effect of an acceptance which adds additional terms or is made conditional? “Any tender of performance is ineffective if it imposes conditions upon its acceptance which the offeror is not entitled to demand.” Riverside Fence Co., supra., at 662. However, the fact that a purported acceptance adds a qualification to the agreed-upon option does not in and of itself terminate the option. As long as the option period has not yet expired, a party may still exercise the option without qualification or condition (even though a prior [ineffective] acceptance may have added such qualifications). Again, the option is truly irrevocable.
The courts have explained that “if the person offering to perform is acting in good faith, and makes the mistake of demanding something to which he is not entitled, he ought to be given the same opportunity to recede from such demand that he is allowed for tendering the correct amount where he has tendered too little, or the right thing where he has tendered the wrong thing…” Nattress & Associates, supra., at 67.
Waiver of Conditions
In the event that a party imposes additional conditions on the exercise of an option, the offeree must specifically point out the alleged defects in the tender or he waives the right to object to the conditions. Civil Code §1501; Code Civ. Proc. §2076. The rationale of this requirement is that the offeror should be allowed to remedy any defects in his tender. Therefore, the offeree should not be allowed to remain quiet at the time of the tender and later surprise the offeror with hidden objections. Riverside Fence Co., supra., at 662.
In addition, an optionor may not do any act or omit to perform any duty calculated to cause the optionee to delay exercising the option within the specified period. A court will look at the good faith of the optionor. If he attempts to prevent the exercise of the option, his behavior may excuse a failure to perform and other conditions precedent to acceptance by the optionee. For example, in the Riverside Fence case, the optionor failed to sign the escrow instructions but would not explain why. The optionee offered to make corrections but the optionor refused to identify any defects in the exercise of the option. The court found that, although plaintiff had not performed, she had attempted in good faith to tender performance and that defendant’s evasive conduct was calculated to prevent timely performance. The court therefore precluded the optionor from asserting that there had not been a timely or proper exercise of the option.
Laine T. Wagenseller is the founder of Wagenseller Law Firm, a full service business and real estate law firm in downtown Los Angeles. The firm represents real estate developers, business and property owners, and investors. For more information visit www.wagensellerlaw.com or contact Mr. Wagenseller at (213) 286-0371.