b. Option Contract

Nature of an option contract

An option contract is a separate and distinct contract from a contract of sale. It is a preparatory contract in which one party grants to another, for a fixed period and at a determined price, the privilege to buy or sell, or to decide whether or not to enter into a principal contract.

NOTE: If the option is perfected, it does not result in the perfection or consummation of the sale. It is binding upon the promisor if the promise is supported by a consideration distinct from the price.

Period within which to exercise the option

• Within the term stipulated; and
• If no period is stipulated, the court may fix one under Civil Code Art. 1197 only if the nature and circumstances of the obligation show that the parties intended a period, or if the period depends on the debtor's will.

Exercise of an option

In an option to buy, the party who has an option may validly and effectively exercise his right by merely notifying the owner of the former’s decision to buy and expressing his readiness to pay the stipulated price.

A notice of acceptance must be communicated to offeror even without actual payment as long as payment is delivered in the consummation stage provided it is still within the period provided.

Effect of the presence and absence of a separate consideration in an option contract

• With separate consideration:
• The Contract is valid;
• Offeror cannot withdraw the offer until after the expiration of the option; and
• A supported option is binding on the offeror and may be enforced by specific performance when appropriate; the option holder cannot be compelled to exercise it. (NCC, Arts. 1324 and 1479)
• Without separate consideration:
• The option contract is not deemed perfected; and
• Offer may be withdrawn at any time prior to acceptance.

NOTE: Even without separate option consideration, timely acceptance communicated while the offer remains effective perfects the sale, provided its essential terms are agreed upon. (NCC, Arts. 1319, 1324, 1458 and 1479)

An option imposes no binding obligation on the person holding the option aside from the consideration for the offer. Until an option is exercised, it is not a sale. (NCC, Arts. 1324 and 1479)

Contract of Sale v. Option Contract

Updated: An option to buy unsupported by consideration separate from the purchase price is only an offer withdrawable before acceptance (F.f. Cruz & Company, Inc. v. NMC Container Lines, Inc., G.R. No. 270449, 11 August 2025).

Elements of a Valid Option Contract

• Consent;
• Subject Matter – An option right to an unaccepted unilateral offer to sell/ accepted unilateral promise to sell or an unaccepted unilateral offer to buy/ accepted unilateral promise to buy a determinate or determinable object for a price certain including the manner of payment; and
• Prestation – A consideration separate and distinct from the purchase price for the option given.

Obligations of the offeror

• Not to offer to any third party the sale of the object of the option during the option period;
• Not to withdraw the offer or option during the option period; and
• To hold the subject matter for sale to the offeree in the event that the latter exercises his option during the option period.

Updated: An option unsupported by separate consideration is merely an offer withdrawable before acceptance, but acceptance while it subsists creates mutual obligations to buy and sell (F.f. Cruz & Company, Inc. v. NMC Container Lines, Inc., G.R. No. 270449, 11 August 2025).

Effect of acceptance and withdrawal of the offer

If the offer had already been accepted and such acceptance has been communicated before the withdrawal is communicated, the acceptance creates a perfected contract, even if no consideration was as yet paid for the option. In which case, if the offeror does not perform his obligations under the perfected contract, he shall be liable for all consequences arising from the breach thereof based on any of the available remedies such as specific performance, or rescission with damages in both cases.

RIGHT OF FIRST REFUSAL

Options

General rule: If the offeror has allowed the offeree a certain period to accept, the offer may be withdrawn at any time before acceptance by communicating such withdrawal.

Exception: When the option is founded upon a consideration as something paid or promised.

An option, sometimes called an “unaccepted offer,” is simply a contract by which the owner of property agrees with another person that he shall have the right to buy his property at a fixed price within a certain time. An option is not of itself a purchase, but merely secures the privilege to buy. It is not a sale of property but a sale of the right to purchase. (Adelfa Properties, Inc. v. CA, G.R. No. 111238)

Effects of option:

• Not supported by an independent consideration (i.e., distinct from the purchase price) – offeror can withdraw the offer at any time before acceptance by communicating such withdrawal
• Supported by independent consideration – offeror cannot withdraw his offer (CIVIL CODE, art. 1324)

OBJECT (Subject Matter)

Option contract v. Right of first refusal

Option money

It is the distinct consideration in case of an option contract. It does not form part of the purchase price; whether it is refundable if the option is not exercised depends on the parties’ agreement and applicable law. (NCC, Arts. 1306 and 1479)

NOTE: Option contract’s distinguishing characteristic is that it imposes no binding obligation on the person holding the option, aside from the consideration for the offer. (Limson v. CA, G.R. No. 135929, April 20, 2001)

Consideration of payment as option money

Payment is considered option money when it is given as a separate and distinct consideration from the purchase price.