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Consideration in Option Contracts Addressed by Court of Appeals

Published May 7, 2013

The New York State Court of Appeals decided two cases recently regarding consideration in option contracts. The two cases, which involved many of the same parties, hinged on the granting of an option in exchange for consideration.

In both cases, the court reiterated principles of contract law. The court ruled that when the cases involve sophisticated parties represented by counsel, the court will not examine the sufficiency of the consideration and will not permit extrinsic evidence to determine what “other good and valuable consideration” might be. If a party wishes to condition its contractual obligations on a particular performance by the other party, it should make that condition part of the written agreement.

In the case of Schron v. Troutman Saunders, Rubin Schron agreed to help fund an acquisition by SVCare, a company that operates nursing homes. Schron’s company agreed to lend $100 million to SVCare to help fund the acquisition. In a separate agreement, executed the same day, Schron’s company was granted an option to buy SVCare at a $100 million strike price. The option agreement contained language indicating that the option was granted in exchange for the mutual covenants in the contract and “other good and valuable consideration,” the adequacy and receipt of which was acknowledged by the parties.

When Schron attempted to exercise the option, SVCare balked, saying that the loan was part of the “good and valuable consideration” contemplated in the option agreement, and that Schron had not followed through on the funding. The Court of Appeals affirmed lower courts’ decisions denying SVCare the opportunity to introduce extrinsic evidence to prove its contention regarding consideration.

In the case of Fundamental Long Term Holdings v. Cammeby’s Funding, Rubin Schron’s company entered into an option agreement with Fundamental Long Term Care Holdings, to purchase one-third of Fundamental’s membership units for a $1,000 strike price. The agreement contained a clause directing Fundamental to facilitate, not interfere with, the purchase. When Schron’s company attempted to exercise the option, Fundamental replied that not only the $1,000 strike price was required, but also the requisite capital contribution, which would amount to approximately $33 million. The Court of Appeals affirmed the rulings of lower courts that the option agreement was unambiguous, and Fundamental had to convey the interest for the $1,000 strike price.

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