Option Consideration

On December 31, 2004 the Texas Supreme Court issued its opinion in 1464-Eight, Ltd. & Millis Management Corporation v. Joppich. This case turned on issue of the enforceability of an option contract if the recited nominal consideration is not paid. The Court determined that the option contract in question was enforceable even though the nominal consideration was not paid. This opinion should not be interpreted by real estate licensees to mean that they don't need to worry about payment of the Option Fee described in the Termination Option paragraph contained in many TREC contracts.

In the Joppich case Ms. Joppich bought a $65,000.00 vacant lot in a residential subdivision from the developer. The earnest money contract required the purchaser to give the developer an option to repurchase the lot if the purchaser failed to commence construction of a residence within 18 months of closing. At closing the purchaser and developer signed an option contract which stated in part "In consideration of the sum of Ten and No/100 ($10.00) Dollars ("Option Fee") paid in cash by Developer, the receipt and sufficiency of which is hereby acknowledged and confessed, Purchaser hereby grants to Developer the exclusive right and option to purchase [the Property].". The ten dollars was never paid. Ms. Joppich later filed suit seeking a determination that the option contract was unenforceable because the ten dollars was not tendered or paid. The Supreme Court based its opinion that the option was enforceable on a legal treatise called the Restatement (Second) of Contracts which states: "(1) An offer is binding as an option contract if it (a) is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time...". The following example is found in the Restatement: "A executes and delivers to B a written agreement "in consideration of one dollar in hand paid" giving B an option to buy described land belonging to A for $15,000.00, the option to expire at noon six days later. The fact that the dollar is not in fact paid does not prevent the offer from being irrevocable.". A commentator quoted by the Court characterizes the Restatement as taking the position that "a false recital of nominal consideration is sufficient to support the irrevocability of an offer so long as the underlying exchange is fair and the offer is to be accepted within a reasonable time.".

When considering the impact of this opinion on the Termination Option provision in TREC contracts, one should read the language of the Termination Option provision. This provision contains bold faced language stating "This paragraph will be a part of this contract ONLY if...Buyer has paid the Option Fee.". This language is very different than the language in the option contract in the Joppich transaction. It appears to create a condition--payment of the option fee-- on the buyer having the right to terminate the contract. The Joppich language does not seem to create such a condition. Absent an opinion specifically interpreting the effect of a failure to tender the Option Fee in a transaction based on the TREC contract, it is not clear if courts would follow the concept set out in Joppich that payment of nominal consideration is just window dressing.

It should also be noted that the Joppich case involves option consideration of ten dollars. There are many references in the opinion to "nominal" consideration. The commentary in the Restatement speaks of "delivery of one dollar or a peppercorn" as "an inconsequential formality". The opinion seems to clearly state that a dollar, ten dollars or a peppercorn are nominal, but are $100.00 or $50.00 nominal? That is an open question.

Real estate licensees should continue to insist on tender of the Option Fee recited in the Termination Option provision of TREC contracts on or before final execution of a TREC contract. Do not use the Joppich decision as a rationale for letting tender of option fees become an afterthought. Remember that Ms. Joppich's $65,000.00 lot transaction ended up being reviewed by the Texas Supreme Court. Please don't let your next deal be the test case determining the effect of the Joppich decision on the TREC Termination Option.