§ 2.15 Missed Deadlines in Option Contracts

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If the total contractual relationship consists of an option contract, the rule that the power of acceptance may be exercised only within the time stated in the offer governs. Standardized stock options, such as those traded on major exchanges, are of this kind. Options, of course, are at the same time offers and contracts. Time is of the essence where the option contract contains a specified expiration date. The option's status as an offer overrides its status as a contract. The mere fact that a price was paid for the lapsed option does not result in forfeiture or other inequity. If one pays five thousand dollars for a thirty day option to buy land for two hundred thousand dollars, the power to accept for thirty days is the exact agreed equivalent of five thousand dollars. An extension of the power, even for a moment of time, by action of a court, is compelling the offeror to give something for nothing.

Where the option is not a ''mere'' option, but part of a more complex transaction such as an option to renew a lease, a lessee's option to purchase, a copyright licensee's option to renew,n1 or some other transaction involving an on-going relationship, other considerations come into play.

Thus, it has been held that the power of the holder of an option to buy or renew, contained in a lease, is not necessarily terminated by failure to give notice of exercise within the specified time. If, in expectation of exercising the power, the lessee has made valuable improvements, and the delay is short without any change of position by the lessor, the lessee will be given specific performance of the contract to sell or to renew.n2 This is often for the purpose of avoiding an inequitable forfeiture, but even where no inequitable forfeiture will occur, specific performance or other appropriate remedy will nevertheless be given if there has been such reliance on the promise as to make literal compliance with the option limitation unconscionable.n3 And even beyond unconscionability, it is to be remembered that where the option is part of a larger contract, notions of substantial performance normally apply to time periods stated in the contract. General rules governing the construction and operation of contracts should override the rules of offer and acceptance in such cases.

At times, courts pronounce a formula to explain when the late exercise of an option will be excused. Commonly, one finds a three part test: (a) that the delay be slight, (b) that the delay has not prejudiced the other party by a change of position, and (c) that a failure to grant relief would result in such hardship as to make literal enforcement of the renewal provision unconscionable.n4 While such formulas can be the beginning of analysis, the following statement more accurately reflects the law-in-action: ''In all of these cases, however, the determination of the court turns not on a single factor but on balancing the equities between the parties.''n5 In no event will relief be given if it appears that the optionee delayed acceptance to speculate without risk.

Legal Topics:

For related research and practice materials, see the following legal topics:

Contracts LawDefensesUnconscionabilityGeneral OverviewContracts LawTypes of ContractsOption ContractsContracts LawFormationAcceptanceGeneral Overview

FOOTNOTES:

(n1)Footnote 1. Record Club of America, Inc. v. United Artists Records, Inc., 890 F.2d 1264 (2d Cir.1989) , on remand, 731 F.Supp. 602 (S.D.N.Y.1990) .

(n2)Footnote 2.

U.S. - Gloyd v. Midwest Refining Co., 62 F.2d 483 (10th Cir.1933) , relief for accident or mistake.

Cal. - Holiday Inns of America v. Knight, 70 Cal.2d 327, 74 Cal.Rptr. 722, 450 P.2d 42 (1969) . Option period not extended, but lateness of annual installment payment excused. ''On the basis of risk allocation, it is clear that each payment of $10,000 was partially for an option to buy the land during that year and partially for the renewal of the option for another year up to a total of five years. With the passage of time, plaintiffs have paid more and more for the right to renew, and it is this right that would be forfeited by requiring payment strictly on time. At the time the forfeiture was declared, plaintiffs had paid the sum of $30,000 for the right to exercise the option during the last two years. Thus, they have not received what they bargained for and they have lost more than the benefit of their bargain. In short they will suffer a forfeiture of that part of the $30,000 attributable to the right to exercise the option during the last two years.''

Colo. - Rocky Mt. Gold Mines v. Gold, Silver & Tungsten, 104 Colo. 478, 93 P.2d 973 (1939) .

Conn. - Galvin v. Simons, 128 Conn. 616, 25 A.2d 64 (1942) ; Xanthakey v. Hayes, 107 Conn. 459, 140 A. 808 (1928) ; F.B. Fountain Co. v. Stein, 97 Conn. 619, 118 A. 47, 27 A.L.R. 976 (1922) .

Md. - Banks v. Haskie, 45 Md. 207 (1876), 99 year lease with covenant for perpetual renewal.

Minn. - Trollen v. City of Wabasha, 287 N.W.2d 645 (Minn.1979) .

N.J. - Sosanie v. Pernetti Holding Corp., 115 N.J.Super. 409, 279 A.2d 904 (1971) .

N.Y. - J.N.A. Realty Corp. v. Cross Bay Chelsea, Inc., 42 N.Y.2d 392, 397 N.Y.S.2d 958, 366 N.E.2d 1313 (1977) ; Sy Jack Realty Co. v. Pergament Syosset Corp., 27 N.Y.2d 449, 318 N.Y.S.2d 720, 267 N.E.2d 462 (1971) .

N.D. -Running against the mainstream is Western Tire, Inc. v. Skrede, 307 N.W.2d 558, 29 A.L.R.4th 948 (N.D.1981) , which refused to excuse a tenant's failure properly to exercise the option. The court did so primarily because the terms of the renewal were significantly below market rates. That the optionor no longer regards the offered terms to be desirable is the economic problem that gives rise to practically all the cases in which a tardy renewal is excused or sought to be excused. Hardship to the optionor, here the landlord, is not usually found where the terms of the option are unfavorable when viewed at the time when the exercise of the option is due. Rather, the question is whether the optionor has changed position because of the failure to receive notice of exercise.

Pa. - American Houses v. Schneider, 211 F.2d 881, 44 A.L.R.2d 1352 (3d Cir.1954) .

(n3)Footnote 3.

Ark. - Gardner v. HKT Realty Corp., 23 Ark.App. 148, 744 S.W.2d 735 (1988) . The tenant had expended large sums in obtaining architectural plans for proposed costly improvements.

Conn. - Galvin v. Simons, 128 Conn. 616, 25 A.2d 64 (1942) . The cost and inconvenience of moving was the ground for excusing a delayed exercise.

(n4)Footnote 4. E.g., Fletcher v. Frisbee, 119 N.H. 555, 404 A.2d 1106 (1979) .

(n5)Footnote 5. Gardner v. HKT Realty Corp., 23 Ark.App. 148, 744 S.W.2d 735 (1988) . In accord, is Southern Region Industrial Realty, Inc. v. Chattanooga Warehouse and Cold Storage Co., Inc., 612 S.W.2d 162, 27 A.L.R.4th 259 (Tenn.1980) , where termination of the lease would have resulted in either extreme economic hardship to the tenant or complete loss of its business operation.

In 95 East Main Street Service Station, Inc., v. H & D All Type Auto Repair, Inc., 162 A.D.2d 440, 556 N.Y.S.2d 385 (1990), there was a slight delay in the exercise of an option to renew a ten year lease. Relief from forfeiture was denied where there was no showing of substantial improvements or loss of good will and where it appears that the tenant deliberately delayed exercising the option while looking for a new location.