Call Option and Option Contract

1.- Approaching

The call option is a real contract. It is concluded with the consent of both the grantor and the beneficiary of the option.

Any property may be subject of an option to buy.

Call options are characterized as atypical contracts. This means that they are not regulated by law. Their configuration has been defined by case law.

The doctrine defines it as a pre-contract. One party gives the other party the exclusive power to decide whether or not to conclude the sales contract. This contract of sale must be made within a certain period of time and under certain conditions.

Recently a client asked me for preparing an option contract. The problem was that they did not want to set a time limit for exercising the option. The term should be unlimited. That is impossible.

There is abundant case law on this subject:

• Judgments of 15 October 1993, 30 June 1994, 28 April 2000, 17 March 1993, 18 June 1993, 24 May 1994, 30 June 1994, 14 February 1997, 11 April 2000, 14 November 2000 (among others).

2.- The parties

The parties in the call option contract are:

• The candidate buyer. Who has the power to purchase or not in the exercise of his call option. He must have the capacity to contract, without requiring specific capacity or legitimation to carry out a sale.
• The grantor. Who grants the call option right and the position of seller in the future sale. In such a way that this will be perfected without any further intervention of his will.

At the time when the call option is granted, the grantor must have the capacity to sell that property.

Si te ha interesado este artículo no dudes en leer:

Can a promise of sale be unilaterally resolved if the buyer does not pay on time?

If a lex comisaria agreement conditioning the resolution is added to the promise of sale, the mentioned resolution will be automatic. And it will be automitic simply because one of the parties is in breach. A unilateral resolution is possible.

3.- Key elements

They are essential elements of this type of contract:

1. Granting the potential buyer the right to decide unilaterally on the implementation of the sale;
2. The predetermination of the contractual object. In other words, the conditions of the purchase are fixed in the call option;
3. The determination of a deadline for the exercise of the call option. The grantor is bound until the potential buyer decides, and may not withdraw the call until the agreed term has elapsed.

The call option is a term in the contract. The purpose of the term is to avoid the grantor being bound by an unlimited period of time.

These contracts usually become bilateral when a price is assigned to the option (the “premium”).  If the call option is free, no obligation arises for the caller.

The call option contract can be autonomous and independent or linked to another one (e.g. lease). It is a consensual contract. It is concluded by consent.

The call option only creates obligations for the grantor. He is obliged to keep the offered goods and to maintain the offer for the set period.

Another characteristic is that it does not require any further activity by the parties. The conclusion of the sale contract therefore depends exclusively on the decision of the buyer.

The grantor is not required to make any further representations.  This highlights the fact that the legal position of the buyer candidate prevails over that of the grantor.

This decision-making capacity of the buyer candidate is not an obligation but a right.

4.- Extinction

The causes of the extinction of the call option are its exercise or its lack of exercise (waiver).

The simple expiration of the term, without exercising the call option, extinguishes both the right, which was born with a predetermined duration, and the contract.

The exercise of the right implies its consummation and, as a consequence, the extinction of the contractual relationship derived from the option.

After the deadline (or by waiver) the grantor recovers his full contractual freedom. The prohibition to conclude contracts or to dispose of the property is lifted. This effect occurs automatically.

The call option must be in good faith and in accordance with the nature of the optional business and the final contract.

Once the call is exercised, it is extinguished and the contract of sale is automatically concluded. The grantor can´t impede its effectiveness. The perfection of the purchase-sale occurs with the communication of the buyer. Once the sale has been completed, it is governed by its own regulations (article 1445 and following of the Civil Code).

If this article has been of interest, we also suggest you to read the following article published on our website: What are the options when an obligation is breached?