What is an “Option To Purchase” and what should it include?

Oct 25, 2023 | Uncategorized

An option to purchase grants a buyer (potentially a tenant) the right to initiate a property sale based on predefined procedures within a set timeframe. While such options can exist independently of lease arrangements and are termed option contracts, they can also be integrated into lease agreements.

In farm leases with an option to purchase clause, the tenant (buyer-tenant) can compel the landowner (seller-landlord) to sell the property by exercising this option. This option is typically part of the standard lease, but sometimes the lease and option to purchase are distinct documents. For instance, after signing a lease, both parties might decide to have a separate option to purchase. Such agreements can be labeled “lease-to-own.” However, they remain leases with an option to purchase clause.

These purchase options might range from a few sentences to several pages in length. Given the complexity of property transactions, overly simplistic options could overlook significant concerns.

Key elements a standard option to purchase clause should cover include:

1. Property Description: Clearly define the property, distinguishing if it’s the same as the leased premises, and identify associated assets like buildings or equipment.

2. Consideration: This legal term denotes an exchange of value, vital for contract enforceability. If separate from the lease, the option to purchase must have its distinct consideration, often in the form of a fee. This fee validates the contract, ensuring it’s not a revocable gift.

3. Option Duration: Specify the period during which the option can be exercised. It could be within fixed dates or anytime during the lease.

4. Option Terms: Detail how the option is activated and the process for the tenant to notify the landlord of their intent to buy.

5. Property Price: State the property’s purchase price, which might be a fixed amount, based on an appraisal at the time of exercising the option, or determined through a formula.

6. Price Acceptance Timetable: Should the price be set through appraisal or a formula, stipulate the time frame for the tenant to accept or reject it. This period might also consider if the tenant can secure financing.

7. Rent Towards Purchase: Some options might allow a portion of the rent to count towards the purchase price. This should be clearly detailed, especially how it’s accounted for and its legal implications.

8. Transfer Terms: It’s often recommended to specify the property transfer terms within the option itself. This preempts potential complications and ensures both parties understand the process.

In essence, an option to purchase provides a structured and legally binding route for potential buyers, often tenants, to buy property under specific conditions. It is essential for both parties to clearly understand and agree upon the terms.

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