Without a doubt, many of you have come across options to purchase in contracts.  What you may not know about them however, is courts may not always enforce them.  So what do courts examine in determining whether to validate an option to purchase?  The recent North Carolina Business Court case, NRC Golf Course, LLC v. JMR Golf, LLC, offers tremendous insight on this issue.

According to the parties’ contract, plaintiff had the option to purchase a golf course for the “fair market value at exercise date validated by an independent third-party appraisal.”  Plaintiff later offered $750,000—the value of the golf course according to an appraiser—which was refused by defendant who argued the option was invalid.

While North Carolina courts in the past have validated options that leave the purchase price to be determined by an appraisal, the Business Court found that in this instance, the option was not enforceable.  According to the Court, the option “not only lack[ed] a sufficiently definite price term, but also lack[ed] a sufficient method by which to determine the price term.”  Thus, the parties’ method for determining purchase price should have been more clearly stated.

The Court found an additional flaw in that the parties did not draft any terms concerning how to select an appraiser or how to resolve discrepancies between different appraisals.  To deal with the latter situation, the Court suggested having the appraisers pick a third appraiser and having the purchase price be the average of the two closest appraisals.

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