Signing a lease can be a very big investment. At the end of a lease term, it is possible that a tenant has spent an enormous sum of money, sometimes more than hundreds of thousands of dollars. At some point, it is even possible that a tenant spent enough money to have purchased the rented space, or the building in which it sits. You may be asking yourself, "why would a tenant spend such a large sum of money only to have to give up the space at the end of its lease term?" Well, it is actually for this very reason that tenants will try to negotiate for a "purchase option" in their lease. What is a purchase option? A purchase option in a lease gives a tenant the right to purchase its individual unit – such as if the leased unit is a condominium – or even the entire building.
As discussed in our previous article, Commercial Lease Options for Tenant Protection: Part 1, there are generally two different kinds of options that may be negotiated into a lease - a right of first refusal ("ROFR") and a right of first offer ("ROFO"). ROFRs in a lease give a tenant the right to match an offer that was previously negotiated, while ROFOs in a lease grant the tenant the right to be the first to negotiate with the landlord, in good faith, in the attempt to strike a deal. In general, landlords do not like to grant options in a lease, especially a purchase option. A purchase option can materially inhibit the landlord's ability to market the property. If the landlord has to first speak to the tenant every time there is an interested purchaser, this can not only delay the entire deal process, but it can also drive potential buyer's away; potential buyers don't like having to negotiate terms of a deal only to be told that they have to wait to see if some other buyer wants to buy the property first.
There are unique times where it would be beneficial for a landlord to grant an option. If the tenant is a credit-worthy and financially stable tenant, the landlord has a certain security that comes with knowing that, if they do not want to sell the property, they have a very promising buyer prospect (at the very least). Alternatively, in a weak leasing market, a landlord may be inclined to agree to certain terms that they would not usually consider – one being to grant a tenant's request for an option.
If a landlord grants a tenant's request for a purchase option, ironing out the details of the option becomes very important. Landlords will want to make sure that the tenant's rights are clearly delineated and not too broadly drafted. For example, it's possible that the landlord agreed to grant the tenant a one-time option, not a recurring one, and, if not properly drafted, the tenant's option may be triggered every single time the landlord tries to sell its property.
The above illustrates merely the tip of the iceberg as it relates to purchase options in a lease. As can be seen, it is very important to make sure to have proper representation when negotiating your lease.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
