What option to purchase means
An option to purchase is a one sided right to buy.
The grantor commits to sell at a stated price, or at a price determined by a stated mechanism, if the holder chooses to buy within a defined period. The holder commits to nothing. They can exercise the option or let it lapse.
That asymmetry is the value, and it is why an option is usually paid for. Consideration for the grant, sometimes called an option fee, is what makes the promise binding, and it is separate from the purchase price.
Exercise is a formal act. The option agreement states how it is exercised, usually by written notice within the period, and the notice must comply. An option exercised late, or in the wrong form, is not exercised at all.
Once validly exercised, the option converts into a binding contract of sale on the agreed terms, and both sides are then committed.
How it is used
Options appear in three familiar settings.
Property. A tenant takes a lease with an option to buy the premises during or at the end of the term, at a price fixed now or determined by valuation later. It lets a business occupy while deciding, and it protects them from the landlord selling to somebody else.
Shares. A call option gives the holder the right to buy shares from an existing shareholder or from the company, at a stated price, within a period. Founder and investor arrangements use them extensively, and employee share schemes are built on them.
Equipment and hire purchase. A hirer has an option to purchase the goods on payment of the final instalment, which is what distinguishes hire purchase from a simple lease.
A workable option agreement states the property or shares precisely, the price or the mechanism for determining it, the option period, the manner of exercise, what happens on exercise, and any conditions.
For property, registration considerations arise. An option over land is an interest that should be protected on the record, otherwise a purchaser without notice may take free of it.
Key features
- A right to buy without an obligation to do so
- The grantor is bound; the holder is not
- Usually supported by consideration paid for the grant
- Exercised by notice, strictly in accordance with the agreement
- Converts into a binding contract of sale on valid exercise
- An option over land should be protected on the register
How this works in Nigeria
Two practical Nigerian points matter more than the theory.
The first is price mechanism. An option at a fixed price agreed years earlier can become either a windfall or a dead letter depending on what happened to values and to the naira in the meantime. A mechanism, such as market value determined by an agreed valuer, avoids that but introduces the comparable evidence problem that makes Nigerian valuation contentious. Neither is perfect, and the choice should be deliberate rather than default.
The second is protection. An option over land is an interest in land, and a grantor who sells the property to somebody else in breach of it leaves the holder with a claim rather than the property, unless the purchaser had notice. Protecting the option, by registration where the state's system allows it or by lodging a caveat, is what makes it worth having.
Exercise formalities catch people out as well. An option exercised by phone call, or a day late, or by somebody without authority, is a lapsed option. The notice provisions should be read when the agreement is signed rather than on the day of exercise.
For share options in a startup, the mechanics belong in the shareholders agreement, and undated transfer forms taken at the outset make exercise practical rather than theoretical.
Option to purchase vs right of first refusal vs pre-emption
Three rights over the same asset, and they are not equivalent.
An option to purchase gives the holder the right to buy at a stated price within a period. The holder decides, and the grantor cannot sell elsewhere during the option period. It is the strongest of the three.
A right of first refusal is weaker. The owner is free to decide whether to sell at all, but if they decide to sell they must first offer it to the holder, usually on the terms a third party has offered. The holder has no power to force a sale.
Pre-emption rights in a company work the same way for shares. An existing shareholder must be offered shares before they can be sold to an outsider, usually on the same terms.
So an option controls whether the sale happens. A right of first refusal only controls who buys, if a sale happens at all. A tenant who wanted certainty and accepted a right of first refusal has less than they think.
Limits and risks
An option binds the grantor only for its period. Once it lapses, the holder has nothing, and a holder who missed the exercise date has no remedy.
Strict compliance with exercise provisions is required, so a technically defective notice can lose the right entirely.
An unprotected option over land is vulnerable to a purchaser without notice, leaving the holder with damages rather than the property.
Fixed price options also age badly in a volatile market, in either direction, and the party who agreed the price may find it commercially unattractive by the time it is exercised.
And an option is only as good as the grantor's title. An option over land the grantor does not own delivers nothing.
Worth knowing
Read the exercise provisions on the day you sign, not on the day you exercise. Nigerian options are lost by notices sent a day late, by email where the agreement required delivery, or signed by somebody without authority, and a lapsed option has no remedy at all.
Questions people ask
What is an option to purchase?
A right to buy an asset at an agreed price within a defined period, without any obligation to do so. The grantor is bound to sell if the holder exercises it; the holder is free to walk away.
Does an option need to be paid for?
Usually yes. Consideration for the grant, often called an option fee, is what makes the promise binding, and it is separate from the purchase price payable if the option is exercised.
How is an option exercised?
By notice in the manner and within the period the agreement states. Strict compliance is required, and a notice that is late, in the wrong form or given by somebody without authority does not exercise the option.
What is the difference between an option and a right of first refusal?
An option lets the holder force a sale at an agreed price. A right of first refusal only requires the owner to offer it to the holder first if they decide to sell, and the owner may decide not to sell at all.
Should an option over land be registered?
It should be protected on the record where the state's system allows, or by lodging a caveat. Otherwise a purchaser without notice may take the property free of it, leaving the holder with a damages claim instead.
Fixed price or market value?
A fixed price gives certainty and ages badly in a volatile market. A valuation mechanism tracks value but introduces the comparable evidence problem that makes Nigerian valuations contentious. Choose deliberately rather than by default.