Citation. 589 F.2d 164 (5th Cir. 1979)
Law Students: Don’t know your Studybuddy Pro login? Register here Brief Fact Summary.
A condominium builder entered into an agreement with a lender whereby the lender would extend mortgages at a set rate to the purchasers of condominiums. The agreement was for a three year period with two six month options. When the options were ready to be exercised, the lender could adjust the interest rates and amount of points charged according to "market conditions".
Synopsis of Rule of Law.
An option contract is comprised of two elements: "1) the underlying contract which is not binding until accepted; and 2) the agreement to hold open to the optionee the opportunity to accept."
Facts.
The Plaintiff, Plantation Key Developer, Inc. (the "Plaintiff"), is a builder of condominiums. The Defendant, Colonial Mortgage Co. of Indiana, Inc. (the "Defendant"), is the Plaintiff's permanent lender. A dispute arose under a loan arrangement between the Plaintiff and the Defendant, in which the Defendant promised to provide mortgage funds to the purchasers of Plaintiff's condominiums from 1973 to 1975. There was a three-phase process involved. First, The Defendant agreed to provide mortgage money through December 31, 1974 at the rate the rate of 9% plus 3 ½ points. Second, the Defendant had the option to extend the agreement for six months "with adjustments in interest and points made if market conditions so demand." Third, the Defendant had a second six-month option to extend its commitment, based on the same market based adjustment as in number two. The Plaintiff paid a nonrefundable commitment fee of $60,000. If the Defendant exercised either six month option, the Plaintiff agreed to pay the Defendant $30,000 each time. A dispute arose with regard to the Defendant's adjustment of the interest rates and points during the first extension – January 1, 1975-July 1, 1975. The Defendant proposed increasing the interest rate to 9 ¾ % and charging 9 points. The Plaintiff refused to pay the required $30,000 for these terms and brought suit.
Issue.
Is the optionee required to make an option payment, if the optioner breaches the terms of the option?
Held.
No. The court first recognizes that the contract it is analyzing is an option contract. An option contract is comprised of two elements: "1) the underlying contract which is not binding until accepted; and 2) the agreement to hold open to the optionee the opportunity to accept." Both the underlying contract and the option must be supported by consideration. The court points out that the consideration for the option was the $60,000 previously paid by the Plaintiff. The Plaintiff's additional payment of the $30,000 was only required "if it chose to exercise its option and to bind Colonial to the quoted rates for the extended period." Based on this information, the Plaintiff's duty to quote a rate for the first sixth month extension was independent of the Plaintiff's payment of $30,000. It would not make any sense to make the Plaintiff pay $30,000 to the Defendant, before the Defendant was informed of the interest rate and the amount of points the Defendant was going to charge.
• The court then affirmed the jury's finding the Defendant's rate quotation did not conform with the contract. Various testimony during the trial demonstrated that available interest rates for similar projects were about 9¾ % and 3 points. Expert testimony established that points between 3 ½ and 4 ½ are available in the market.
Discussion.
This case offers a very interesting discussion about the rights and obligations of an optioner and an optionee.
