Option agreement
Contract Law

An option agreement is a legally binding contract whereby one or more person grants an interest in property or other subject matter which may be exercised at a future date. For instance, an option agreement may grant an option to:

1. purchase specified shares;
2. acquire a business;
3. purchase the rights in a patent application; and/or
4. grant a license to use property, whether exclusive, non-exclusive or other specified terms.

An option agreement should specify the person who has been granted the option, and how the option is to be exercised. Usually options are exercised in writing within a specified period. There is no reason why a sum may not be payable to acquire the option in the first instance, however frequently options are gratuitous. Indeed, if a price is to be paid to acquire the grant of the option, such sum may be deemed to serve some purpose if the option is eventually exercised, such as a down-payment to towards the subject matter of the option. Furthermore, the option agreement may fix the particular terms of the transaction that is to take place in the event that the option is exercised, such as percentages to be paid in royalties (in the case of a license), the time to complete a sale (in the event of an acquisition of property), or the price of the asset (a fixed price, market value or some specified calculation).

As such agreements are usually intended to be legally binding, the usual requirements to form a legally binding contract must be in place; otherwise the option is not enforceable. It is prudent to specify the law to govern the exercise of the option and the jurisdiction in which disputes will be heard.