William and Mary Law School

Options for Owners and Outlaws

 Lee Anne Fennell

Property rights delegate control to owners and other possessors within a compass that is specified spatially, temporally, and functionally. Within these confines, owners have choices. They can decide where and how to engage in a particular use, and which of the permissible uses to pursue at a given time. Within legal limits, they may hold onto or dispose of the property interest, or a portion of it. Drawing on analogies from finance, scholars have characterized these choices (and many others) as “real options.” An option gives its holder the right, but not the obligation, to do a particular thing, such as to sell or buy an entitlement at a given price. Real options in land are not explicit—no financial instrument changes hands—but rather are embedded in the structure of the entitlement itself. I will refer to them here as “embedded real property options” (“ERPOs”) to distinguish them from formal options to buy and sell interests in land, which parties may also transact over.

ERPOs have four notable characteristics. First, they do not typically feature fixed exercise prices or well-defined exercise periods. For example, an owner of a fee simple absolute may hold an option to develop the land for an indefinite period of time, but the price of exercising that option will fluctuate with the prices of inputs to development.

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