An Option on California Real Estate – How to Determine if It Truly Is An Option, and What Is Needed To Exercise It

Options are frequently entered concerning California real estate in a number of situations. A rent-to-own or lease option contract usually contains an option; options are taken on bare land in order to develop it in the future; and someone may option a parcel while they are trying to obtain neighboring properties. However, experienced Sacramento and El Dorado real estate lawyers are consulted after the agreement is entered and a problem arises, and the question becomes whether or not you really have an option or something else like a right of first refusal.

An offer to sell property on certain terms can usually be revoked by the offeror (owner) any time before it is accepted. However, if the offeror and offeree (potential buyer) enter an agreement, with “independent consideration” that requires the offer to remain open and irrevocable for a period of time, the offeror cannot revoke it. This is an option contract. “Independent consideration” means that there was an actual payment of consideration of some kind (money, a car, a bag of emeralds, etc.) that was separate and distinct from the payment for the purchase of the property if the option was exercised. If the option is contained in a lease, the provisions of the lease, including the rent to be paid, is sufficient consideration for the option.

If there is no actual separate consideration actually received by the Optionor, it remains revokable. However, in this case, if the option is exercised before it is revoked, the optionor becomes bound under the contract even there was no consideration.

The option agreement must contain essential material terms of the purchase and sale- these are the identities of the buyer and seller, identity of the property, and the purchase prices. “Exercise” of the option is the optionee – buyer’s acceptance of the offer to sell the property. The agreement can specify exactly how the option is to be exercised, such as by a notice of exercised delivered by hand to the owner, or by fax or messenger pigeon. If the method is specified, it must be followed exactly. If no method is specified, it may be exercised in any reasonable way that gives the optionor notice that the optionee is accepting the offer and ready to perform.

Real estate lawyers most often see problems in the exercise of the option. Where the agreement has a detailed procedure, or specific timing requirements, parties may want to consult with their attorney to make sure they get it right.