Option Consideration


Have you ever wondered why some contracts contain a provision that states that the purchaser has paid the seller $100 as "Option Consideration?" To understand the reason for including a provision like that in a contract, start with the premise that an option requires the payment of consideration to the seller to be enforceable.

One-Sided Option

The law will not enforce a completely one-sided agreement if the party that is required to perform gets nothing in return for the promise to perform. An option, where the seller is required to sell his property at the election of the Purchaser, but the Purchaser is not required to buy, is a one-sided or "unilateral" agreement.

To assure that the Purchaser will be able to enforce the option if the Purchaser chooses to buy the Property, the Purchaser should pay the seller something at the time the option agreement is made. The payment should be non-refundable, even if the Purchaser decides not to buy the Property. Although sellers often require substantial payments to compensate them for tying up their property for a period of time, a hundred dollars is sufficient consideration to cause an option to be legally enforceable.

Two-Sided Option

A contract of sale is typically different from an option, in that it is a two-sided or "bilateral" agreement. The seller has agreed to be obligated to sell, and the purchaser has agreed to be obligated to buy. Even if the contract has a contingency for the benefit of the purchaser, such as a financing contingency, the contract would still be bilateral if the purchaser is required to do something, such as make application for financing.

A bilateral contract does not need independent consideration, since promises and obligations are sufficient consideration. In a bilateral contract of sale, the seller and purchaser have each promised to be obligated to do something, unlike an option where the purchaser has no obligations.

Independent Option Consideration

So, why does a bilateral contract sometimes require a provision that independent option consideration has been paid? The answer is that what appears to be a bilateral contract, when it has a "free look" provision, may be construed by a court to be a one-sided, unilateral contract.

If, for example, the contract allows the purchaser to have a period of time to inspect the Property and gives the purchaser the right to cancel the contract for any reason (or no reason), then the Contract looks a lot like an option. If the purchaser is entitled to require that the earnest money be refunded, then the seller is left with nothing in exchange for the seller's promise.

If a court construes a contract as an option and sees that the seller may receive no consideration, then the court could hold that the purchaser is not entitled to enforce the contract.

Wrap-up

If someone were to read an "Option Consideration" provision without an understanding of its purpose, it would appear to be for the benefit of the seller. After all, it requires the purchaser to pay non-refundable money (usually $100) to the seller. But the provision is included in the contract for the benefit of the purchaser, because it helps assure that the contract will be enforceable against the seller.

With that provision, and assuming that the consideration is actually paid to the seller, the contract should not be found to be unenforceable, at least not due to failure of consideration.