diff --git a/src/bin_client/test/test_contracts.sh b/src/bin_client/test/test_contracts.sh
index 696f834f1..3b1a82789 100755
--- a/src/bin_client/test/test_contracts.sh
+++ b/src/bin_client/test/test_contracts.sh
@@ -581,6 +581,13 @@ bake_after $client transfer 1 from bootstrap1 to big_map_get_add -arg '(Pair (Pa
 bake_after $client transfer 1 from bootstrap1 to big_map_get_add -arg '(Pair (Pair 400 (Some 1232)) (Pair 400 (Some 1232)))'
 bake_after $client transfer 1 from bootstrap1 to big_map_get_add -arg '(Pair (Pair 401 (Some 0)) (Pair 400 (Some 1232)))'
 
+# Test for issue #262
+tee /tmp/bug_262.tz <<EOF
+{ parameter unit ; storage unit ; code { DROP ; LAMBDA  unit unit {} ; UNIT ; EXEC ; NIL operation ; PAIR } }
+EOF
+init_with_transfer /tmp/bug_262.tz $key1 'Unit' 1 bootstrap1
+assert_balance bug_262 "1 ꜩ"
+
 printf "\nEnd of test\n"
 
 show_logs="no"
diff --git a/src/lib_micheline/micheline.ml b/src/lib_micheline/micheline.ml
index 2394e6d2d..3d610e41f 100644
--- a/src/lib_micheline/micheline.ml
+++ b/src/lib_micheline/micheline.ml
@@ -171,14 +171,16 @@ let canonical_encoding ~variant prim_encoding =
       (fun args -> Seq (0, args)) in
   let annots_encoding =
     let split s =
-      let annots = String.split_on_char ' ' s in
-      List.iter (fun a ->
-          if String.length a > 255 then failwith "Oversized annotation"
-        ) annots;
-      if String.concat " " annots <> s then
-        failwith "Invalid annotation string, \
-                  must be a sequence of valid annotations with spaces" ;
-      annots in
+      if s = "" then []
+      else
+        let annots = String.split_on_char ' ' s in
+        List.iter (fun a ->
+            if String.length a > 255 then failwith "Oversized annotation"
+          ) annots;
+        if String.concat " " annots <> s then
+          failwith "Invalid annotation string, \
+                    must be a sequence of valid annotations with spaces" ;
+        annots in
     splitted
       ~json:(list (Bounded.string 255))
       ~binary:(conv (String.concat " ") split string) in