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Out-Law Guide 4 min. read

Assignment and novation

19 Aug 2011, 4:40 pm

Assignment involves the transfer of an interest or benefit from one person to another. However the 'burden', or obligations, under a contract cannot be transferred.

Assignment in construction contracts

As noted above only the benefits of a contract can be assigned - not the burden. In the context of a building contract:

• the employer may assign its right to have the works constructed, and its right to sue the contractor in the event that the works are defective – but not its obligation to pay for the works;
• the contractor may assign its right to payment of the contract sum - but not its obligation to construct the works in accordance with the building contract or its obligation to meet any valid claims, for example for defects.

After assignment, the assignee is entitled to the benefit of the contract and to bring proceedings against the other contracting party to enforce its rights. The assignor still owes obligations to the other contracting party, and will remain liable to perform any part of the contract that still has to be fulfilled since the burden cannot be assigned. In practice, what usually happens is that the assignee takes over the performance of the contract with effect from assignment and the assignor will generally ask to be indemnified against any breach or failure to perform by the assignee.  The assignor will remain liable for any past liabilities incurred before the assignment.

In construction contracts, the issue of assignment often arises in looking at whether collateral warranties granted to parties outside of the main construction contract can be assigned.

Funders may require the developer to assign contractual rights against the contractor and the design team as security to the funder, as well as the benefit of performance bonds and parent company guarantees. The developer may assign such rights to the purchaser either during or after completion of the construction phase.

Contractual assignment provisions

Many contracts exclude or qualify the right to assignment, and the courts have confirmed that a clause which provides that a party to a contract may not assign the benefit of that contract without the consent of the other party is legally effective and will extend to all rights and benefits arising under the contract, including the right to any remedies. Other common qualifications on the right to assign include:

• a restriction on assignment without the consent of the other party, whether or not such consent is not to be unreasonably withheld or delayed;
• only one of the parties may assign;
• only certain rights may be assigned – for example, warranties and indemnities may be excluded;
• a limit on the number of assignments - as is almost always the case in respect of collateral warranties;
• a right to assign only to a named assignee or class of assignee.

Note that in some agreements where there is a prohibition on assignment, it is sometimes possible to find the reservation of specific rights to create a trust or establish security over the subject matter of the agreement instead.

Legal and equitable assignment

The Law of Property Act creates the ability to legally assign a debt or any other chose in action where the debtor, trustee or other relevant person is notified in writing. If the assignment complied with the formalities in the Act it is a legal assignment, otherwise it will be an equitable assignment.

Some transfers can only take effect as an equitable assignment, for example:

• an oral assignment;
• an assignment by way of charge;
• an assignment of only part of the chosen in action;
• an assignment of which notice has not been given to the debtor;
• an agreement to assign.

If the assignment is equitable rather than legal, the assignor cannot enforce the assigned property in its own name and to do so must join the assignee in any action. This is designed to protect the debtor from later proceedings brought by the assignor or another assignee from enforcing the action without notice of the earlier assignment.

Security assignments

Using assignment as a way of taking security requires special care, as follows:

• if the assignment is by way of charge, the assignor retains the right to sue for any loss it suffers caused by a breach of the other contract party;
• if there is an outright assignment coupled with an entitlement to a re-assignment back once the secured obligation has been performed, it is an assignment by way of legal mortgage.

Please see our separate Out-Law guide for more information on types of security.

Restrictions on assignment

There are restrictions on the assignment of certain types of interest on public policy grounds, as follows:

• certain personal contracts – for example, a contract for the employment of a personal servant or for the benefit of a motor insurance policy cannot be assigned;
• a bare cause of action or 'right to sue' where the assignee has no commercial interest in the subject matter of the underlying transaction cannot be assigned;
• certain rights conferred by statute – for example, a liquidator's powers to bring wrongful trading proceedings against a director – cannot be assigned;
• an assignment of a contract may not necessarily transfer the benefit of an arbitration agreement contained in the contract;
• the assignment of certain rights is regulated – for example, the assignment of company shares or copyright.

If you want to transfer the burden of a contract as well as the benefits under it, you have to novate. Like assignment, novation transfers the benefits under a contract but unlike assignment, novation transfers the burden under a contract as well.

In a novation the original contract is extinguished and is replaced by a new one in which a third party takes up rights and obligations which duplicate those of one of the original parties to the contract. Novation does not cancel past rights and obligations under the original contract, although the parties can agree to novate these as well.

Novation is only possible with the consent of the original contracting parties as well as the new party. Consideration (the 'price' paid, whether financial or otherwise, by the new party in return for the contract being novated to it) must be provided for this new contract unless the novation is documented in a deed signed by all three parties.

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Assignment in Options Trading

Introduction articles, what is an options assignment.

In options trading , an assignment occurs when an option is exercised.   

As we know, a buyer of an option has the right but not the obligation to buy or sell an underlying asset depending on what option they have purchased. When the buyer exercises this right, the seller will be assigned and will have to deliver or take delivery of what they are contractually obliged to. For stock options, it is typically 1 , 000 shares per contract for the UK ; and 100 shares per contract in the US.   

As you can see, a buyer will never be assigned, only the seller is at risk of assignment. The buyer, however, may be auto exercised if the option expires in-the-money .

The Mechanics of Assignment

Assignment of options isn’t a random process. It’s a methodical procedure that follows specific steps, typically beginning with the option holder’s decision to exercise their option. The decision then gets routed through various intermediaries like brokers and clearing +houses before the seller is notified.

• Exercise by Holder: The holder (buyer) of the option exercises their right to buy (for Call ) or sell (for Put ).
• Random Assignment by a Clearing House: A clearing house assigns the obligation randomly among all sellers of the option.
• Fulfilment by the Writer: The writer (seller) now must fulfill the obligation to sell (for Call) or buy (for Put) the underlying asset.

Option Assignments: Calls and Puts

Call option assignments.

When a call option holder chooses to exercise their right, the seller of the call option gets assigned. In such a situation, the seller is obligated to sell the underlying asset at the strike price to the call option holder.

Put Option Assignments

Similarly, if a put option holder decides to exercise their right, the put option seller gets assigned. The seller is then obligated to buy the underlying asset at the strike price from the put option holder.

The Implications of Assignments for Options Traders

Understanding assignment in options trading is crucial as it comes with potential risks and rewards for both parties involved.

For Option Sellers

Option sellers, or ‘writers,’ face the risk of unexpected assignments. The risk of being assigned early is especially present for options that are in the money or near their expiration date. We explain the difference between American and European assignments below.

For Option Holders

For option holders, deciding when to exercise an option (potentially leading to assignment) is a strategic decision. This decision must consider factors such as the intrinsic value of the option, the time value, and the dividend payment of the underlying asset.

Can Options be assigned before expiration?

In short, Yes, but it depends on the style of options you are trading. 

American Style – Yes, this type of option can be assigned on or before expiry. 

European Style – No, this type of option can only be assigned on the expiry date as defined in the contract specifications.

Options Assignment Example

For example, an investor buys XYZ PLC 400 call when the stock is trading at 385. The stock in the coming weeks rises to 425 after some good news, the buyer then decides to exercise their right early to buy the XYZ PLC stock at 400.  

In this scenario, the call seller (writer) has been assigned and will have to deliver stock at 400 to the buyer (sell their stock at 400 when the prevailing market is 425).   

An option typically would only be assigned if it is in the money, considering factors like dividends which do play an important role in exercise/assignments.

Can an Options Assignment be Prevented?

Assignment can sometimes come as a bit of a surprise but normally you should see it coming. You can only work to prevent assignment by closing the option before expiry or before any possible risk of assignment.

Managing Risks in Options Trading

While options trading can offer high returns, it is not devoid of risks. Therefore, understanding and managing these risks is key.  

Buyers Risk: The premium paid for an option is at risk. If the option is not profitable at expiration, the premium is lost.  

Writers Risk: The writer takes on a much larger risk. If a call option is assigned, they must sell the underlying asset at the strike price, even if its market price is higher.

Options Assignment Summary

The concept of ‘assignment’ in options trading, although complex, is a cornerstone of understanding options trading. It not only clarifies the responsibilities of an options seller but also helps the traders to gauge and manage their risks more effectively. Successful trading involves not just knowing your options but also understanding your obligations.

Options Assignment FAQs

What is options assignment.

Options assignment refers to the process by which the seller (writer) of an options contract is obligated to fulfill their contractual obligation to buy or sell the underlying asset, as specified by the terms of the options contract.

When does options assignment occur?

Options assignment can occur when the buyer of the options contract exercises their right to buy (in the case of a call option) or sell (in the case of a put option) the underlying asset before or at expiration .

How does options assignment work?

When a buyer exercises their options contract, a clearing house randomly assigns a seller who is short (has written) the same options contract to fulfill the obligations of the exercise.

What happens to the seller upon options assignment?

If assigned, the seller (writer) of the options contract is obligated to fulfill their contractual obligation by buying or selling the underlying asset at the specified price (strike price) per the terms of the options contract.

Can options be assigned before expiration?

Yes, options can be assigned at any time (depending on contract type) before expiration if the buyer chooses to exercise their right. However, it is more common for options to be assigned closer to expiration as the time value diminishes.

What factors determine options assignment?

Options assignment is determined by the buyer’s decision to exercise their options contract. They may choose to exercise if the options contract is in-the- money and it is financially advantageous for them to do so.

How can I avoid options assignment? 

As a seller (writer) of options contracts, you can avoid assignment by closing your position before expiration through a closing trade (buying back the options contract) or rolling it over to a future expiration date.

What happens if I am assigned on a short call option?

If assigned on a short call option, you are obligated to sell the underlying asset at the specified price (strike price). This means you would need to deliver the shares . To fulfill this obligation, you may need to buy the shares in the open market if you do not hold them .

What happens if I am assigned on a short put option?

If assigned on a short put option, you are obligated to buy the underlying asset at the specified price (strike price). This means you would need to purchase the shares .  

How does options assignment affect my account?

Options assignment can impact your account by requiring you to fulfill the obligations of the assigned options contract, which may involve buying or selling the underlying asset. It is important to have sufficient funds or margin available to cover these obligations.

OptionsDesk Tips & Considerations

You should always have enough funds in your account to cover any assignment risk. If you have a short call position and it is in-the-money at the time of an ex-dividend be aware of extra assignment risk here as buyer/holder of the option may look to exercise to qualify for the dividend. Assignments can happen at any time!

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Important information : Derivative products are considerably higher risk and more complex than more conventional investments, come with a high risk of losing money rapidly due to leverage and are not, therefore, suitable for everyone. Our website offers information about trading in derivative products, but not personal advice. If you’re not sure whether trading in derivative products is right for you, you should contact an independent financial adviser. For more information, please read our Important Derivative Product Trading Notes .

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What Is an Option Assignment?

Definition and Examples of Assignment

How does assignment work, what it means for individual investors.

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An option assignment represents the seller of an option’s obligation to fulfill the terms of the contract by either selling or purchasing the underlying security at the exercise price. Let’s explain what that means in more detail.

Key Takeaways

• An assignment represents the seller of an option’s obligation to fulfill the terms of the contract by either selling or purchasing the underlying security at the exercise price. 
• If you sell an option and get assigned, you have to fulfill the transaction outlined in the option.
• You can only get assigned if you sell options, not if you buy them.
• Assignment is relatively rare, with only 7% of options ultimately getting assigned.

An assignment represents the seller of an option’s obligation to fulfill the terms of the contract by either selling or purchasing the underlying security at the exercise price. Let’s explain what that means in more detail.

When you sell an option to someone, you’re selling them the right to make you engage in a future transaction. For example, if you sell someone a put option , you’re promising to buy a stock at a set price any time between when the transaction happens and the expiration date of the option.

If the holder of the option doesn’t do anything with the option by the expiration date, the option expires. However, if they decide that they want to go through with the transaction, they will exercise the option. 

If the holder of an option chooses to exercise it, the seller will receive a notification, called an assignment, letting them know that the option holder is exercising their right to complete the transaction. The seller is legally obligated to fulfill the terms of the options contract.

For example, if you sell a call option on XYZ with a strike price of $40 and the buyer chooses to exercise the option, you’ll be assigned the obligation to fulfill that contract. You’ll have to buy 100 shares of XYZ at whatever the market price is, or take the shares from your own portfolio and sell them to the option holder for $40 each.

Options traders only have to worry about assignment if they sell options contracts. Those who buy options don’t have to worry about assignment because in this case, they have the power to exercise a contract, or choose not to.

The options market is huge, in that options are traded on large exchanges and you likely do not know who you’re buying contracts from or selling them to. It’s not like you sell an option to someone you know and they send you an email if they choose to exercise the contract, rather it is an organized process.

In the U.S., the Options Clearing Corporation (OCC), which is considered the options industry clearinghouse, helps to facilitate the exchange of options contracts. It guarantees a fair process of option assignments, ensuring that the obligations in the contract are fulfilled.

When an investor chooses to exercise a contract, the OCC randomly assigns the obligation to someone who sold the option being exercised. For example, if 100 people sold XYZ calls with a strike of $40, and one of those options gets exercised, the OCC will randomly assign that obligation to one of the 100 sellers.

In general, assignments are uncommon. About 7% of options get exercised, with the remaining 93% expiring. Assignment also tends to grow more common as the expiration date nears.

If you are assigned the obligation to fulfill an options contract you sold, it means you have to accept the related loss and fulfill the contract. Usually, your broker will handle the transaction on your behalf automatically.

If you’re an individual investor, you only have to worry about assignment if you’re involved in selling options. Even then, assignments aren't incredibly common. Less than 7% of options get assigned and they tend to get assigned as the option’s expiration date gets closer.

Having an option assigned does mean that you are forced to lock in a loss on an option, which can hurt. However, if you’re truly worried about assignment, you can plan to close your position at some point before the expiration date or use options strategies that don’t involve selling options that could get exercised.

The Options Industry Council. " Options Assignment FAQ: How Can I Tell When I Will Be Assigned? " Accessed Oct. 18, 2021.

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Option Exercise and Assignment Explained w/ Visuals

Last updated on February 11th, 2022 , 06:38 am

Buyers of options have the right to exercise their option at or before the option’s expiration. When an option is exercised, the option holder will buy (for exercised calls) or sell (for exercised puts) 100 shares of stock per contract at the option’s strike price.

Conversely, when an option is exercised, a trader who is short the option will be assigned 100 long (for short puts) or short (for short calls) shares per contract.

• Long American style options can exercise their contract at any time.
• Long calls transfer to +100 shares of stock
• Long puts transfer to -100 shares of stock
• Short calls are assigned -100 shares of stock.
• Short puts are assigned +100 shares of stock.
• Options are typically only exercised and thus assigned when extrinsic value is very low.
• Approximately only 7% of options are exercised.

The following sequences summarize exercise and assignment for calls and puts (assuming one option contract ):

Call Buyer Exercises Option   ➜  Purchases 100 shares at the call’s strike price.

Call Seller Assigned  ➜  Sells/shorts 100 shares at the call’s strike price.

Put Buyer Exercises Option  ➜  Sells/shorts 100 shares at the put’s strike price.

Put Seller Assigned   ➜  Purchases 100 shares at the put’s strike price.

Let’s look at some specific examples to drill down on this concept.

Exercise and Assignment Examples

In the following table, we’ll examine how various options convert to stock positions for the option buyer and seller:

As you can see, exercise and assignment is pretty straightforward: when an option buyer exercises their option, they purchase (calls) or sell (puts) 100 shares of stock at the strike price . A trader who is short the assigned option is obligated to fulfill the opposite position as the option exerciser. 

Automatic Exercise at Expiration

Another important thing to know about exercise and assignment is that standard in-the-money equity options are automatically exercised at expiration. So, traders may end up with stock positions by letting their options expire in-the-money.

An in-the-money option is defined as any option with at least $0.01 of intrinsic value at expiration . For example, a standard equity call option with a strike price of 100 would be automatically exercised into 100 shares of stock if the stock price is at $100.01 or higher at expiration.

What if You Don't Have Enough Available Capital?

Even if you don’t have enough capital in your account, you can still be assigned or automatically exercised into a stock position. For example, if you only have $10,000 in your account but you let one 500 call expire in-the-money, you’ll be long 100 shares of a $500 stock, which is a $50,000 position. Clearly, the $10,000 in your account isn’t enough to buy $50,000 worth of stock, even on 4:1 margin.

If you find yourself in a situation like this, your brokerage firm will come knocking almost instantaneously. In fact, your brokerage firm will close the position for you if you don’t close the position quickly enough.

Why Options are Rarely Exercised

At this point, you understand the basics of exercise and assignment. Now, let’s dive a little deeper and discuss what an option buyer forfeits when they exercise their option.

When an option is exercised, the option is converted into long or short shares of stock. However, it’s important to note that the option buyer will lose the extrinsic value of the option when they exercise the option. Because of this, options with lots of extrinsic value remaining are unlikely to be exercised. Conversely, options consisting of all intrinsic value and very little extrinsic value are more likely to be exercised.

The following table demonstrates the losses from exercising an option with various amounts of extrinsic value:

As we can see here, exercising options with lots of extrinsic value is not favorable. 

Why? Consider the 95 call trading for $7. Exercising the call would result in an effective purchase price of $102 because shares are bought at $95, but $7 was paid for the right to buy shares at $95. 

With an effective purchase price of $102 and the stock trading for $100, exercising the option results in a loss of $2 per share, or $200 on 100 shares.

Even if the 95 call was previously purchased for less than $7, exercising an option with $2 of extrinsic value will always result in a P/L that’s $200 lower (per contract) than the current P/L. F

or example, if the trader initially purchased the 95 call for $2, their P/L with the option at $7 would be $500 per contract. However, if the trader decided to exercise the 95 call with $2 of extrinsic value, their P/L would drop to +$300 because they just gave up $200 by exercising.

7% Of Options Are Exercised

Because of the fact that traders give up money by exercising an option with extrinsic value, most options are not exercised. In fact, according to the Options Clearing Corporation,  only 7% of options were exercised in 2017 . Of course, this may not factor in all brokerage firms and customer accounts, but it still demonstrates a low exercise rate from a large sample size of trading accounts.

So, in almost all cases, it’s more beneficial to sell the long option and buy or sell shares instead of exercising. We like to call this approach a “synthetic exercise.”

Congrats! You’ve learned the basics of exercise and assignment. If you’d like to know how the exercise and assignment process actually works, continue to the next section!

Who Gets Assigned When an Option is Exercised?

With thousands of traders long and short options in the market, who actually gets assigned when one of the traders exercises their option?

In this section, we’ll run through the exercise and assignment process for options so you know how the assignment decision occurs.

If a trader is short a single option, how do they get assigned if one of a thousand other traders exercises that option?

The short answer is that the process is random. For example, if there are 5,000 traders who are long a call option and 5,000 traders who are short that call option, an account with the short option will be randomly assigned the exercise notice. The random process ensures that the option assignment system is fair

Visualizing Assignment and Exercise

The following visual describes the general process of exercise and assignment:

If you’d like, you can read the OCC’s detailed assignment procedure here  (warning: it’s intense!).

Now you know how the assignment procedure works. In the final section, we’ll discuss how to quickly gauge the likelihood of early assignment on short options.

Assessing Early Option Assignment Risk

The final piece of understanding exercise and assignment is gauging the risk of early assignment on a short option.

As mentioned early, only 7% of options were exercised in 2017 (according to the OCC). So, being assigned on short options is rare, but it does happen. While a specific probability of getting assigned early can’t be determined, there are scenarios in which assignment is more or less likely.

The following scenarios summarize  broad generalizations  of early assignment probabilities in various scenarios:

In regards to the dividend scenario, early assignment on in-the-money short calls with less extrinsic value than the dividend is more likely because the dividend payment covers the loss from the extrinsic value when exercising the option.

All in all, the risk of being assigned early on a short option is typically very low for the reasons discussed in this guide. However, it’s likely that you will be assigned on a short option at some point while trading options (unless you don’t sell options!), but at least now you’ll be prepared!

Next Lesson

Options Trading for Beginners

Intrinsic and Extrinsic Value in Options Trading Explained

Option Greeks Explained: Delta, Gamma, Theta & Vega

Additional resources.

Exercise and Assignment – CME Group

Learn About Exercise and Assignment – CME Group

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Option Agreement – A Complete Guide

Have you recently found the perfect piece of land for your new development and want to ensure it is not sold out from under your nose while you are gaining planning permission? Or perhaps you have invested in a development project that you know will reap large profits. How can you secure a right to purchase the property once the venture is complete so you can maximise on your investment? The answer to all of these questions is to get yourself an option agreement.

• What Is An Option Agreement?

An option agreement is an agreement made between a landowner and a potential purchaser of their property. In simple terms, both parties enter into an agreement, in return for a non-refundable sum of money, the potential purchaser of the land has a legally binding option to buy at a certain date or within an agreed time-frame, or after completion of a certain event (for example after obtaining planning permission).

It is a point for negotiation when drawing up the option agreement whether the non-refundable deposit will be taken off the final purchase price of the property.

Aside from the examples in the opening paragraph, other situations which may give rise to an option agreement being put in place include:

• If a developer wishes to purchase any land adjacent to their existing development project site in the future in order to extend their venture. • If the land being developed is sub-divided among owners, a buyer can buy up the full site piece by piece by obtaining option agreements from the individual owners.

There are four types of option agreements:

a) Call option – where a buyer has the right (but not an obligation) to buy the property from the seller. b) Put option – where the seller has a right (but again, not an obligation) to sell the property to the buyer. c) Cross option – the buyer receives a call option and the seller, in return, gains a put option. d) Reverse option – occasionally these types of options are used to secure an overage payment (more on overages below…). Here the seller receives an option to purchase the property back after the ‘trigger’ event occurs if the overage payment is not forthcoming. The resale price will reflect the increase in value of the land as a result of the ‘trigger’ event (e.g. planning permission being granted).

In accordance with recent(ish) legislative changes (i.e. the Perpetuities and Accumulations Act 2009), option agreements which came into effect after the 6th April 2010 can be for any length of time, and the duration should be negotiated between the purchaser and the seller. Ensure you do negotiate this point or else the option on the land will be viewed as indefinite….not ideal from a seller’s point of view. Any agreements signed before the 6th April 2010 must be exercised within 21 years of the option being granted.

• The Advantages of an Option Agreement.

For the Developer • Securing an option agreement minimises your risk. If obtaining planning permission takes longer than expected, you can be confident that you have a legally binding agreement that prevents the seller from getting frustrated and selling the land to another buyer ( see here ) regarding an article outlining all the planning terms a planning commission committee member may have to consider, it may evoke a little sympathy depending on what kind of day you have had). • You may be able to secure the final purchase price of the property in the option agreement. This can be a major advantage for agreements that span years rather than months because if land value increases, you are only bound to pay the contracted price. • An option can be registered, securing your potential investment.

For the Seller

• If the property market is experiencing a downturn, you are assured of an interested buyer at some point in the future. • You will normally receive a non-refundable deposit in exchange for the option. • In certain circumstances the option agreement can include an overage clause, enabling you to claw-back additional money after the sale has completed.

• The Importance of Accurate Drafting

Unlike pre-emption agreements, that simply give the prospective buyer the right of first refusal if the vendor decides to sell, an option agreement is a legally binding contract. Therefore, do not be surprised that should you (or the purchaser, if you are the seller) succeed in completing the event on which the execution of the option depends, you will actually have to buy or sell the property, even if other circumstances have changed. The key to avoiding any “oh no what have I done!” moments is to ensure the drafting of the option agreement is as watertight as a submarine. The following conditions should be covered in a good agreement: • The duration of the term of the option • The amount of land included in the option • The condition or conditions which must be met for the option right to be executed • The amount of the deposit and payment terms • Any extension on the duration of the option if applicable • The final purchase price of the property if applicable • A disputes resolution procedure • Details of how each party may terminate the agreement under certain conditions

For security you need to register a call option agreement with HM Land Registry. A notice of the option agreement will be put on the title stating the potential buyer has a right over the land if the event needed to execute the option takes place. In the case of a pull option, the execution of the agreement is driven by the seller, therefore the buyer has no exercisable rights over the land so there is no reason to register this type of option agreement.

• Overage Agreements

All vendors want to receive the best possible price for their land. However, if your land will only be worth its maximum value after a certain event, then you need to include a provision in the sale contract for an overage payment to be made once the agreed occurrence sets off the increase in the value of the property. Examples of events that can be agreed by the seller and the purchaser that can trigger overage to occur are:

• There is a potential for future planning permission being granted on the land. • Surplus profit being made by the purchaser after development of the land has been completed. • The seller had to sell the property at a lower value due to an issue regarding the land which needed to be resolved for the proposed development to be viable (i.e. flood risk) and remedying the situation was less expensive than predicted.

The public sector often refers to overage as ‘claw-back,’ where, in the event that they sell land at a discount, that discount can be “clawed back” if certain ‘trigger’ events occur at a later date.

• Securing Overage Payments

You can secure an overage payment by using one or a combination of the following methods:

• Placing a restrictive covenant over the land. • Using a guarantee or bond. • Imposing a mortgage or charge over the property. • Acquiring a seller’s/equitable lien over the property. • Freehold right of re-entry (the property reverts back to the seller of the overage if payment is not made). • Positive covenant and restriction.

Notoriously complex, overage agreements require expert drafting to ensure that there are no nasty surprises down the line. And the surprises can be extremely nasty indeed. For example, in Ministry of Defence v County and Metropolitan Homes (Rissington) Ltd, the parties neglected to consider the possibility that the developer would not demolish all 37 houses on the land in question. Because they only demolished 35 and turned two properties into a shop, the developer had to pay a total of nearly £1 million pounds in overage.

• The golden rule: when in doubt, don’t leave it out!

With accurate drafting, option agreements and overage can provide both developers and land owners with security no matter how unpredictable the property market may become in the future.

Have you had any notable experiences regarding option agreements or overages? We and others involved in commercial property would love to hear about them. Feel free to comment below and share your experience and wisdom.

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What are the Key Terms in a Call Option Agreement?

By Efe Kati

Updated on 9 June 2022 Reading time: 5 minutes

This article meets our strict editorial principles. Our lawyers, experienced writers and legally trained editorial team put every effort into ensuring the information published on our website is accurate. We encourage you to seek independent legal advice. Learn more .

What is a Call Option Agreement?

What are the key terms of a call option agreement, key takeaways, frequently asked questions.

As a business owner, you may wish to familiarise yourself with call options. A Call Options Agreement ( COA ) is an excellent way for individuals and businesses to speculate on how well your business will do. Additionally, if your business offers an investment service, you may want to use stock options yourself. This article will explain a call option agreement and explore five key terms to look out for in a call option agreement. 

A call option agreement is a type of contract involving a call option holder and an option seller. The option holder has the right to buy a set number of shares in a company at a specific price (the ‘strike price’) before an expiration date. Next, the option buyer will also typically have to pay a premium to the seller. Additionally, the option premium is a set price that the parties agree to in the contract.

The option holder will lose their right to use the options contract on the option expiration date. Notably, the option holder has a ‘right’ and not an ‘obligation’. This means that the option holder can effectively choose whether to buy the shares at a price or not. 

A call option agreement can be a good way for investors to make money on a share with fewer risks. Since the buyer can choose to buy the option, they can elect not to if the share does not reach a profitable price. As a result, the buyer’s only loss is the option premium rather than the implied volatility of buying the share outright. Similarly, the option seller can make money because of the premium that they receive. In some cases, businesses can also use options to avoid potential risks in certain investments. 

If you are entering into a call option agreement, you should look to negotiate some of the critical terms of the agreement. Some key terms include:

1. The Parties to the Agreement

Naturally, your contract will have to include the identity of the parties to the contract. In the formal document, you may often find this under the ‘grantor’ and ‘grantee’. Additionally, this is important for outlining the specific person who has the right as part of the options contract.

2. The Option Shares

The agreement should outline the exact scope of the shares. This includes the number of shares and the company to whom those shares belong. 

In this respect, your option could cover two types of shares. However, it could also cover shares that a company has yet to issue, which will mean that your agreement is a call option to subscribe for shares. Or it could be over shares that already exist, in which case you will have a call option to purchase shares. 

3. The Option Premium

An option premium is an amount that you pay the option seller to have the option in the first place. This price, and whether your contract will include it at all, will depend on who you are buying the options from. When a company sells options over its shares, it might choose not to include a premium. Alternatively, it may include only a nominal amount. 

However, if you are buying an option from a third party specialising in options trading, you may find yourself paying a significant option premium. 

4. Exercise Price

The exercise price is the fixed price of money you will pay for the shares. The seller will often disclose this price when agreeing. 

There may be no exercise price within the call option agreement in some cases. Instead, there may be conditions that the option holder has to satisfy to exercise their right. Ultimately, whether the seller will include an exercise price will depend on the nature of the relationship between the seller and the buyer of the options.

5. Expiration Date

The expiration date of the call option agreement is the last day that the option holder can exercise their right to purchase the shares. After this date, the option holder will lose their right as per the options contract. In some cases, the options seller may choose to define specific conditions. This may result in the expiry of the contract alongside picking a specific expiry date. 

You should look out for the key terms of your call options agreement and remember that you can always try to negotiate more favourable critical terms for you.

In short, you should be aware of trading options as a business owner. This can be an excellent way to: 

• raise money for your business; 
• hedge against potential risk; or 
• invest in another business . 

Additionally, some key terms to look out for include: 

• the parties to the agreement; 
• the option shares; 
• the option premium; 
• the exercise price; and 
• the expiration date. 

It would help to remember that you can always negotiate the key terms of this agreement, including the option’s price.

If you need help understanding or negotiating the key terms of your Call Option Agreement, our  experienced contract lawyers  can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0808 196 8584 or visit our  membership page .

An option premium is a set amount of money that you may have to pay to the option seller for the options contract. 

An expiration date is when the option right ceases to be exercisable.

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22 November 2022

An option agreement is a contract between a landowner and a developer where the developer has the opportunity (but not an obligation) to purchase land from the landowner with a certain time frame. It is binding agreement entered into between the parties and is often used by developers to secure the property whilst they explore the planning potential of the subject land.

There is usually an option fee paid by the developer to the landowner. This is often as little as £1. The purchase price for the property may be agreed between the parties at the outset of the option. Alternatively, a mechanism for calculating the final price may be inserted into the document.

Developer’s security The option agreement prohibits the landowner from selling the property to a third party during the option period whilst the developer is exploring the viability of the project. Once the developer has satisfied himself as to the feasibility of the proposed development, he can trigger the purchase of the property by ‘exercising’ the option. Once the option has been exercised, it becomes an agreement to purchase making it obligatory for the landowner to sell and the developer to purchase on the terms set out in the agreement.

On the other hand, if it turns out that the project is not suitable, then the developer can simply walk away and let the option lapse without any penalties or legal repercussions. What is in it for the landowner? An option is an ‘option’ to purchase the land and not an ‘obligation’. The downside for the landowner is that the developer may decide, well into the option period, that the proposed development is not viable and pull out of the deal. However, if drafted and agreed diligently, option agreements can be a practical method by which landowners can offer up their land for development and reap the rewards of doing so, without having to be directly involved in either the planning process, or construction. Are there other kinds of arrangements that may be more suitable? Although an option agreement is one of the most common methods used to structure and secure a potential development in the UK, there may be other types of arrangements that could be more suited to give effect to the intentions of the parties, such as conditional contracts, promotion agreements, overage agreements, or pre-emption agreements. Every situation and eventuality require careful thought and professional advice to ensure that the documentation is suitable for the intended purpose.

Phillips Law can advise and guide on the most appropriate mechanisms and agreements to facilitate development whether you are a landowner or developer. Please do not hesitate to get in touch with one of our Commercial Property team for more information.

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The Benefits of Licensing Agreements for IP Owners

On Behalf of Coleman & Horowitt, LLP | Mar 7, 2018 | Intellectual Property law , News

There are generally two ways to exploit the value of intellectual property rights: use the property yourself or transfer the rights to someone else to use.  A transfer of rights – whether in the form of an assignment or license – is often an attractive option for IP owners since it is not always possible or practical for an owner to put their intellectual property to use themselves.

If a total and unrestricted transfer is made of the rights, then the transfer is referred to as an “assignment” or “sale.”  If fewer than all the rights are transferred, then the transfer is called a “license.”  In an IP licensing agreement, the owner of intellectual property (licensor) grants permission for another (licensee) to use the property, subject to the terms of the agreement.  In exchange for permission to use the IP, the licensee pays the licensor an agreed amount of money, typically in the form of a royalty.  A licensing agreement can have tremendous benefits for licensors.

For one, licensing to an already established company can allow an IP owner to avoid the manufacturing, marketing, and distribution costs associated with getting their IP into the market.  Additionally, licensing to an already established company may allow a licensor to penetrate the market much sooner.  The reality is that many IP owners have valuable ideas but either lack the methods, resources, or know-how to build their IP into a profitable business, or decide to remain exclusively a creator or inventor.  The utility of licensing is that it allows a licensor to partner with a licensee to monetize the licensor’s IP in a way that would not be possible if the licensor had to do everything on their own.

Unlike an assignment or sale, a licensing agreement can be structured to allow for the return of the rights should the deal fail to live up to the licensor’s expectations.  Major advantages of a license also include the ability to split rights geographically (wherein a licensee’s rights are limited to a specific region) and the ability to split rights temporally (e.g., granting an exclusive license for 5 years after which the license becomes non-exclusive).  Also, a license allows an IP owner to grant rights to multiple licensors, whereas an assignment transfers the rights to a single party subject to any existing licenses.  Finally, an IP owner who enters into an assignment gives up all rights to any future profit derived from the IP, subject to any profit sharing or royalty provisions.

While licensing agreements have many advantages, a poorly drafted one can lead to unexpected troubles.  Moreover, because IP licensing agreements tend to be complex documents, many important components are routinely overlooked by inexperienced drafters. An article on some of the most overlooked components in IP licensing agreements is forthcoming. Authored by Brandon Hamparzoomian

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• Options, Pre-emptions and Overage