Does an option actually protect your interest ? - Posted by John (Rome)

Posted by John (Rome) on June 30, 2003 at 15:47:34:

correct…and in the article it states, albeit being an equipmentlease, that the option is contigentupon satisfactory fulfillment of the lease.

Does an option actually protect your interest ? - Posted by John (Rome)

Posted by John (Rome) on June 28, 2003 at 23:33:15:

I’ll try again - as my previous thread on this went down like a lead balloon. Again thanks to b-ca for mentioning this in the chat room

here’s the link - anyonecare to elaborate?

http://www.firstam.com/faf/html/cust/jm-executory.html

Re: Does an option … - Posted by Eric C

Posted by Eric C on June 29, 2003 at 15:54:06:

Hi Guys -

Interesting discussion regarding options, but you may not be stretching the boundary lines nearly enough.

Options can be used in far more creative ways – for instance, they could be used to unbundle some of the more common property rights which would definitely influence value.

Who gets what and whey they get it is completely negotiable.

Rather than merely capture an opportunity to profit at some point in the future (under certain circumstances or favorable conditions), options could also be used to
ensure that those circumstances (or conditions) occur right on schedule.

Take care,

Eric C

re:Does an option … - Posted by John (Rome)

Posted by John (Rome) on June 29, 2003 at 05:20:22:

ok…going to post this on legal - see if someone responds there.

However just for those who didn’t have a chance here’s an excerpt of wha John C. Murray says

Quote

The majority of cases that have dealt with this issue hold that an option to purchase (or a right of first refusal) is an executory contract that can be rejected under § 365 of the Bankruptcy Code. See In re Kellstrom Industries, Inc., 286 B.R. 833, 835 (Bankr. D. Del. 2002) (“we conclude, like the majority of the courts before us, that the right of first refusal . . . is an executory contract which may be rejected by the Debtors under section 365”); In re E-Z Serve Convenience Stores, Inc., 289 B.R. 45, 53 n.4 (Bankr. M.D. N. Carolina 2003) ("[s]ome courts have also discussed the issue of whether a right of first refusal is an executory contract. The majority of courts hold that it is an executory contract"); In re Emerald Forest Const., Inc., 226 B.R. 659, 665 (Bankr. D. Montana 1998) (ruling that an option to purchase granted in connection with an equipment lease was an executory contract where “the DIP has announced, but has not followed through.”

End quote.

Re: re:Does an option … - Posted by JohnBoy

Posted by JohnBoy on June 29, 2003 at 11:42:52:

"In re Emerald Forest Const., Inc., 226 B.R. 659, 665 (Bankr. D. Montana 1998) (ruling that an option to purchase granted in connection with an equipment lease was an executory contract where “the DIP has announced, but has not followed through.”

This is pertaining to an EQUIPMENT LEASE, where the lease involves BOTH parties to perform in order for the Optionee to be able to exercise their option to buy the equipment.

When dealing with real estate, an option only requires one party to perform, which would be the SELLER giving you the option to buy. The SELLER is required to perform by giving you the right to buy the property where the seller is required to sell. The Optionee (buyer) is not required to buy, and only retains the option to buy.

The above case cited pertains to equipment leases. When you enter into an equipment lease it requires both sides to perform something in order for the leasee to be allowed to exercise their option to buy the equipment.

The most common type of equipment lease is where a business wants to buy equipment. The bank or leasing company will buy the equipment from the equipment company. The bank will then turn around and lease the equipment back to the buyer. The equipment lease will generally give the buyer an option to buy the equipment at the end of the lease for $1. Or in some equipment leases it may be 10% of the cost of buying the equipment.

In order for the buyer to be able to exercise their option to buy the equipment, the buyer must first perform on the lease by making all the lease payments. Upon making all the lease payments, the buyer may then exercise the option and buy the equipment or just give it back to the bank.

The reason for the ruling you read cited in the case is to prevent a buyer from having all the lease payments discharged in a BK, where the buyer could then make a claim they have an option to buy the equipment for x amount.

Otherwise, you could go out and buy $100k worth of equipment by leasing it from a leasing company, then turn around and file BK and having the lease discharged in the BK, and then making a claim on your $1 buy out option, where you could keep $100k worth of equipment and wiping out the lease payments, leaving the leasing company or bank with nothing to recoup.

If you don’t perform by making all the lease payments, you can’t exercise the option to buy the equipment for $1 at the end of the lease. This is why creditors would object to this in a BK…hence the reason for the court’s ruling. It’s a lease that rquires BOTH parties to PERFORM something on each side.

An option to buy real estate only requires ONE side to perform, which is the seller that is required to sell to you, should you choose to exercise your option. You as the optionee are not required to perform on anything. You only retain the right to buy should you choose to exercise the option. The seller has the obligation to sell if you choose to exercise the option.

Hmmm…then again… - Posted by John (Rome)

Posted by John (Rome) on June 30, 2003 at 04:04:28:

Hi,

sorry to go back on this…but there’s a point which has me scratching my head - specifically,

you stated that "An option to buy real estate only requires ONE side to perform, which is the seller that is required to sell to you, should you choose to exercise your option. You as the optionee are not required to perform on anything. You only retain the right to buy should you choose to exercise the option. The seller has the obligation to sell if you choose to exercise the option. "

and quote froma John C. Murray’s article "1 Williston on Contracts § 5:16 (4th ed. 1990) (“The traditional view regards an option as a unilateral contract which binds the optionee to do nothing, but grants him the right to accept or reject the offer in accordance with its terms within the time and in the manner specified in the option”).

so everything is ok…HOWEVER

if you think about it, you as the optionee DO have an obligation under a L/O - namely, perform on the lease - if you don’t your right to the option goes out the window.

Now - the question is: am I totally off track in that this is a non issue any way you put it or may there be something in it?

Gawd I luv articulate threads :slight_smile:

Re: re:Does an option … - Posted by John (Rome)

Posted by John (Rome) on June 29, 2003 at 14:53:13:

thanks for the articulate response - as always. Cleared that up.

Cheers.

J.

J.

Re: Hmmm…then again… - Posted by yshNJ

Posted by yshNJ on June 30, 2003 at 13:30:34:

Hi John,

Nice to meet you. Correct me if I’m wrong but isn’t an option different from a L/O? A lease option would be a combination of an option and a lease agreement. Even though they are sometimes included in the same contract, the difference is that the contract will specify that the option part of the deal will be contingent upon satisfactory adherence to the lease agreement part. So that contract is no longer a straight option. Please feel free to correct me if you disagree.

Thank you.