This section is from the book "Practical Real Estate Methods For Broker, Operator & Owner", by Thirty Experts. Also available from Amazon: Practical Real Estate Methods for Broker, Operator, Owner.
An option is a privilege which the owners give to a person to purchase the premises at a certain price and on certain terms. If nothing is paid for an option either in money or other consideration it is void, and under no circumstances is a broker entitled to a commission for procuring an option, unless the same is valid, or is finally consummated by a sale. It often happens that negotiations are apparently ended, and no time or opportunity is available to embody the terms in a precise and definite form, and a small deposit is paid to bind the bargain. If under such circumstances all of the terms and conditions are fully determined and settled upon, the refusal of the owner to enter into a formal contract cannot deprive the broker of his compensation. But if any of the terms are left in doubt or to be subject to further consideration, the taking of the deposit and giving of an informal receipt avails nothing, as the parties have not yet arrived at that stage of the meeting of the minds of the contracting parties which the law calls for. Thus, in one case negotiations had been going on for some time; the parties finally came to a bargain and the owner received a deposit of fifty dollars and gave a receipt in the following form: June 6th, 1902.
Received from J. M. Johnson the sum of Fifty dollars on account of contract, price of $25,000 on the sale of premises No. 264 Delancey Street, $950 to be paid on June 7th and $24,000 on the delivery of the deed, the contract to be made at office of vendors' attorney, June 7th, at 12 o'clock noon.
The intending purchaser never made any further payment nor even entered into a written contract, and the owner was notified that the purchaser would not make any further payment. The receipt was signed by the owner only. It contained no obligation on the part of the purchaser whatever. The Court held that the receipt was a nullity and did not amount to a contract and could not be enforced by the vendor and was a mere option to purchase and the broker was not entitled to any compensation.
In another case the parties, after negotiating for some time, finally agreed upon the price and an instrument was drawn whereby the owner agreed to sell the premises at $34,000 and the purchaser agreed to buy them at that price. The sum of fifty dollars was paid to the vendor to bind the contract, which was to be executed at the office of the vendors' attorney, at which time $1,000 addition was to be paid, $8,500 was to be paid on the delivery of the deed and $25,000 in a purchase money mortgage. This agreement was signed by both parties, the seller and the purchaser. Subsequently the parties met at the office of the vendors' attorney to enter into a formal contract and were unable to agree upon the terms of the mortgage, and thereupon the purchaser refused to enter into any further contract, and the negotiations were broken off and were never resumed. The question arose whether the said written instrument, of itself, was or was not an enforcible contract for the sale and purchase of the real estate therein referred to. It was held that it was not a contract upon which the vendors could rest an action to compel the vendee to perform, but was merely, at least so far as the vendee was concerned, an agreement that he would thereafter execute a contract to purchase or forfeit the fifty dollars as liquidated damages. In other words, the vendors gave to the vendee an option, good until the meeting at which the contract was to be executed, and the paper did not constitute a contract enforcible against the vendee, because it was too indefinite in its terms. It was not stated how long the mortgage was to run, one, two or three years; what rate of interest it should contain, and how payable, quarterly, semi-annually, annually, or at the end of the term. Until the parties had agreed upon these details, it would be impossible to draw such mortgage. No court would have jurisdiction to determine it for them. And upon the whole case it was decided that the broker never procured a complete meeting of the minds of both vendor and vendee, either in writing or by parol, or part one and part the other, and that consequently he had never earned his commissions.