What is a purchase option?

What is a Purchase Option?

Updated on January 30, 2024

What is a Purchase Option in Real Estate Law?

Sometimes a lease agreement will include an option for the tenant to purchase the leased property during or at the end of the term of a lease agreement.

Such an option provides the tenant the ability to purchase the property under particular circumstances that are set forth in the option terms of the lease agreement.

The option to purchase is binding on the landlord’s successors who may purchase the property during the term of the lease. Similarly, if the landlord dies during the lease term, the option is enforceable against the landlord’s estate.

What Is A Purchase Option

What are the Necessary Requirements

Purchase options must contain the minimum terms required for an enforceable option to purchase and must satisfy the statute of frauds. Meaning, the option must be in writing. The essential terms of an option include the terms of the option, the purchase price, description of the property, and the identity of the buyer.

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It is important to note that the purchase price does not need to be specifically set forth in the option. It is suitable to state in the option language that the price will be determined by an appraiser or other third person or will be the fair market value of the property.

However, an option that simply states that the purchase price will be at a price mutually agreed to by both parties would likely be considered too uncertain to be enforceable by the tenant.

How to Exercise

The purchase option must be exercised in the manner and in accordance with the terms of the option. Meaning, the option must be exercised in the time and within the manner specified in the lease agreement.

It is important to note that the exercise of an option is considered to be an acceptance of an irrevocable offer and thus the terms of the exercise must typically be identical to terms of the option.

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If, alternatively, the terms of acceptance deviate from the terms of the option, such exercise is not effective.

Timing

The option needs to be exercised prior to expiration of the term. If no specific time is specified, the option needs to be exercised with a reasonable amount of time.

When, however, the purchase option provides that it must be exercised within a particular number of days before the expiration of the lease, the option may be performed at any time prior to termination of the right.

Payment

Payment for the option is not necessarily required as a condition for the exercise of the option. Rather, the tenant can exercise the option by providing timely notice and make payment upon conveyance of the property.

The contract will, however, dictate performance. Thus, if the contract requires payment in order to exercise the option, timely notice alone will not be sufficient.

The technical aspects of a purchase option can be difficult to navigate. Retaining an experienced real estate attorney to review your lease and provide assistance with exercising said option is important to ensure you do not lose valuable rights.

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