Legal Difference Between an Option Contract and Firm Offer

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An option contract is an agreement that fills the necessary requirements for establishing a contract and limits the promiser's ability to rescind an offer. A firm offer occurs when a buyer makes an irrevocable offer to a seller. The primary difference is that an option contract entitles the buyer to the option to purchase the items at a later time, whereas a firm offer gives the buyer the right to buy the items outright at any time.

Firm Offer Defined

A firm offer is a written offer that cannot be retracted or revised for a specific time period. In most contracts, an offer is typically valid upon acceptance. Until the offer is accepted, there are no legal consequences if the offer is later taken off the table. With a firm offer, the offer cannot be revoked for the time period outlined in the offer contract. This function locks the parties into the offer during that period if it's accepted.

Firm Offer Example

A software dealer makes a firm offer on Sept. 1 in a signed contract to sell an accounting software package to a client for $5,000. The terms of the offer state that the client has until Oct. 1 to accept the offer. On Sept. 15, the client receives a letter from the dealer recalling the offer. On Sept. 20, the client writes back to accept the offer of Sept. 1. Because the dealer's offer letter constituted a firm offer that could not be revoked before Oct. 1, the dealer's attempt to revoke the offer is unenforceable.

Option Contract Defined

An option contract is an arrangement between a buyer and seller that grants the purchaser the right to buy or sell a specific asset at a later date at a price agreed upon by both parties, called the "strike price." "Put options" give the party benefiting from the option, called the "beneficiary," the right to require the party granting the option, called the "grantor," to buy the property at the strike price. "Call options" give the beneficiary the right to require the grantor to sell the property to them at the strike price.

Option Contract Example

A developer wishes to buy a property, but does not have the cash on hand to purchase it at full price. He purchases an option to hold the lot while he seeks out additional capital. The option contract will include the length of the option period and the purchase price of the property. The property owner promises not to sell the property during the option period in exchange for a fraction of the purchase price. The property owner must sell the property to the option buyer at the strike price, even if its value has skyrocketed during the option period.

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