Negotiated option: Overview, definition, and example
What is a negotiated option?
A negotiated option is a provision in a contract that gives one party the right, but not the obligation, to enter into a future agreement or transaction under pre-agreed terms. This option is "negotiated" because the terms, such as price, timing, or conditions, are specifically agreed upon between the parties during the negotiation process. The holder of the negotiated option can exercise it at a later date, typically within a set timeframe, to execute the agreement or transaction under the agreed terms.
For example, in real estate, a buyer may negotiate an option to purchase a property at a specific price within the next six months, giving them the flexibility to decide whether to move forward with the purchase or not.
Why is a negotiated option important?
A negotiated option is important because it provides flexibility and security for both parties in a transaction. For the party holding the option, it offers the ability to secure a favorable deal without being committed to immediate action. For the other party, offering a negotiated option can attract potential buyers or partners by providing them with a sense of security and clear terms for future action.
This type of option is common in business deals, real estate transactions, and financial contracts, where one party might need more time to decide whether to move forward with a particular deal.
Understanding negotiated option through an example
Imagine a company that is negotiating with a supplier for a long-term contract. The buyer negotiates an option that allows them to purchase additional units of the supplier’s product at a set price over the next year. This gives the buyer flexibility to purchase the units if their business needs increase, without committing to buy them immediately. On the supplier’s side, this option provides assurance that the buyer might choose to purchase the products in the future under pre-negotiated terms.
In another example, a real estate developer might negotiate an option to purchase land at a fixed price within a specified period. This option gives the developer the right to proceed with the purchase if market conditions become favorable, but they are not obligated to do so.
Example of negotiated option clause
Here’s how a negotiated option clause might look in a contract:
“The Buyer shall have the option to purchase additional units of Product X at the agreed price of $50 per unit, with the option to exercise this right within one year of the date of this Agreement.”
Conclusion
A negotiated option is a flexible and strategic provision that allows a party to secure a future agreement or transaction on agreed terms without being bound to execute it immediately. This option provides both flexibility and security, benefiting both parties by offering the possibility of future action while maintaining control over the timing and conditions of that action.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.