An option is a term within a contract that gives one party (the Grantee) the option to exercise a right granted by the other party to the agreement (the Grantor). Two common examples of options are:

1. Options in a lease giving the tenant the option to enter into a further term of the lease with the landlord.
2. Options that give a party the right, but not the obligation, to purchase property from a vendor.

The agreement governing the parties rights in relation to the option (e.g. the lease or the option deed) outlines what is required by the Grantee to exercise the option and give notice to the Grantor of the exercise of the option.

What the courts have said about exercising options

Options are considered an offer by the Grantor, the exercise  of which is considered an acceptance of the offer by the Grantee . The construction of the terms of the option will dictate if there has been a valid exercise by the Grantee.

The law surrounding the exercise of options has made one thing clear – to be valid there must be strict compliance with the method of exercising the option.  Examples of cases where an option was found to be invalidly exercised include Builder Developments Pty Limited v PIC Sales Pty Limited [2003] NSWSC 1245, in which the Court rejected the proposition that there had been substantial performance in exercising an option, and observed that the role of the courts in contractual disputes was limited to deciding whether or not there has been a breach of an obligation by a party.

In observing that the construction of the underlying contract will determine if there has been valid exercise of an option, Bryson JA said in Comdox No 24 Pty Limited v Robins [2009] NSWSC 367:

If the language used really means that it is a condition of effective exercise of option that the notice must be on blue paper and delivered by a man in a clown suit, pink paper or a woman in a pixy suit will not be effective. There must be compliance; there is no allowance for taking some other non-complying course, even if it appears to achieve the same result

Takeaway points

The valid exercise of an option requires strict compliance with the method of acceptance provided in the underlying agreement.  However, the courts have reiterated that the valid exercise of an option will be determined on a case-by-case basis: that is, there is no universal principle to determine when an option  has been validly exercised by a Grantee.  Ensuring that there is strict compliance by a Grantee with the terms of the agreement under which the option was granted will avoid unnecessary and uncertain applications to court seeking orders for specific performance by a Grantor.