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."
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.