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Tell Me My Options: Drafting an Option to Purchase the Property
When considering a new lease for a single use property, generally the tenant of the property will want to consider its “exit” strategies at the time of the initial negotiation of the lease. Potential “exit” strategies may include: assignment of the lease, early termination rights and options to purchase the property. The last on the list of these “exit” strategies, options to purchase the property, often creates substantial business issues for the landlord and tenant, as well as drafting issues for their legal representatives. As a result, certain conceptual issues, set forth and discussed below, should be addressed when drafting an option to purchase the property.
Purchase Price
An option to purchase is really a one-sided right; if the terms are favorable for the tenant at the time of exercise, the option will be exercised, and if the terms are not favorable at the applicable time for exercise, the option will not be exercised. As a result, from the tenant's perspective, the purchase price should be established in an absolute dollar amount, in order to allow the tenant to evaluate the value of the option. By contrast, the landlord would want the option expressed in terms of “market rate” at the time the option is exercised. While this “market rate” approach does provide the tenant with the right to purchase the property before any other person or entity, it does not provide the tenant with a sum certain to plan for the acquisition of the property. Therefore, the landlord and tenant should carefully consider what the option purchase price will be and include that specified amount in the lease document. In the event the lease contains multiple options to purchase the property that are exercisable at various points during the term of the lease, the option prices could be indexed up to reflect the rising costs, in order to take into account rising costs in the real estate market.
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