What is an Option Contract?

Understanding Option Contracts

An option contract is a special agreement. It lets a person have the chance to buy land or property at a set price within a certain time. But they don't have to buy it if they don't want to. This is different from a "right of first refusal," which means you can buy the property if the owner wants to sell it to someone else first.

How Option Contracts Work

When someone uses their option to buy, it becomes a binding contract. This means both the buyer and seller have to follow through. You can accept the option verbally or in writing, but you must follow the rules in the agreement. For example, if the contract says you need to give written notice, you must do that.

Time and Ownership

The contract starts when you use the option, not when you first get the option. You become the owner only after using the option. If you don’t use the option in time, it expires.

Consideration and Offers

If you didn't pay anything for the option, it’s just an offer and can be taken back before you accept it. But if you paid for the option, it can’t be taken back during the option period. However, the price paid for the option usually isn’t taken off the purchase price unless the contract says so.

Options in Leases

Sometimes, an option to buy can be part of a lease agreement. This means you can choose to buy the property during the lease period. This option can be passed on to someone else if they take over your lease. If the lease doesn’t say when to use the option, you can use it anytime during the lease. If you renew your lease, the option to buy usually renews too, unless the new agreement says otherwise.

Payments and Terms

A lease may say you need to pay for the option, or it might allow lease payments to count towards the purchase price if you decide to buy. If you don’t buy, the landlord can keep the payment for the option. For example, one court case showed that if lease payments were meant to go towards buying the property, and the tenant didn’t buy, the landlord could keep those payments.

Court Decisions on Options

Courts have sometimes ruled that what looks like a sale agreement is actually a lease with an option to buy. For example, if someone moves in, makes payments, and does minor repairs, but the landlord still handles major repairs and insurance, it might be seen as a lease with an option to buy, not a sale.

Recording Option Contracts

In Ohio, you can record (officially document) an option contract if it lasts more than one year. This helps protect the agreement. But not all contracts can be recorded. For example, a second mortgage paid over ten years didn’t qualify for recording under Ohio law.

An option contract gives you the chance to buy property later, without having to do it right away. It's important to understand the rules and terms in the contract to make sure everything is done correctly.