Lease purchase options can be valuable. However, without the proper contractual language, complications may result. In a series of upcoming blogs, including, this one, we discuss two recently decided cases involving lease agreements and purchase options. This blog will examine a case decided last year – Petrolink, Inc. v. Lantel Enterprises (“Petrolink”) – for the ruling that a tenant is released from further rent obligations once the tenant has exercised its purchase option. The next blog will review Smyth v. Berman for its ruling earlier this year that a purchase option clause in a lease for years terminates at the end of the lease term.
In Petrolink, the dispute between the landlord and tenant was not immediately over the rents. The first issue at trial was determining the purchase price based on the fair market value of the property. For this, the court appointed its own appraiser and set the purchase price based on the appraiser’s valuation. It was only after the court set the purchase price that the tenant requested an offset from the purchase price by the total rents the tenant paid after it exercised its purchase options. The trial court declined the request.
The tenant appealed the decision, and to its benefit, the appellate court reversed. Because the tenant’s action was one for specific performance, the appellate court found that “to place the parties in the positions in which they would have been at the time the sale and purchase contract should have been performed” the offset must be allowed. (Petrolink, Inc. v. Lantel Enterprises (2018) 21 Cal.App.5th 375, 379-80.) Indeed, the appellate court relied on seminal precedent for its position – i.e., Stratton v. Tejani (1982) 139 Cal.App.3d 204 (“Stratton”). Specifically, in pages 388-89 of its opinion, the Petrolink court adopted the following from Stratton:
Granting a buyer the value of the profits and rents from the property from the time a transaction should have been consummated and adjusting this amount by the value of the seller’s lost use of the purchase money ‘is designed to relate the performance back to the contract date of performance and to adjust the equities between the parties because of the delayed performance’ . . . These adjustments are ‘more like an accounting between the parties than like an assessment of damages.’
In further support of its decission, the Petrolink court explained that when a tenant exercises its option to purchase, “the lease and its incorporated option agreement cease to exist, and, instead, a binding contract o[f] purchase and sale c[omes] into existence between the parties. (Petrolink, Inc. v. Lantel Enterprises (2018) 21 Cal.App.5th 375, 384; Emphasis added.) Thus, once the tenant elects to purchase the property, both the lease and further rent obligations come to an end.
However, as is typically the case with commercial leases, Petrolink explained that the parties could always contract to require the tenant to pay rent after it has exercised its option to purchase. (Petrolink, Inc. v. Lantel Enterprises (2018) 21 Cal.App.5th 375, 386-87.) Under this scenario, rent obligations would presumably terminate at the close of escrow.
Our real estate attorneys at Schorr Law have a great deal of experience with real estate matters and disputes. To see if you qualify for a free 30-minute consultation, contact us today!