Option to Purchase in Commercial Lease: What You Need to Know
When you’re a commercial landlord, you should know certain key terms are critical to your lease agreement. However, are you considering the sale of the property? If so, you may want to insert a clause that gives your commercial tenant an option to purchase.
For a moment, consider this. You own a commercial building and list it for sale. Realtor after realtor comes back with bad news. For whatever reason, your property won’t move.
After a long period of frustration, you receive a phone call. No, it’s not from a buyer. However, a small business offers a proposal. Would you think about leasing your building? And, including an option to purchase?
You’re looking at empty space and wondering if it makes sense. Truth be told, you might be ready for a clean break. Meanwhile, some money is better than none. You, therefore, speak with an experienced real estate attorney to solicit legal advice.
When you consult with your lawyer, you learn something interesting. You might negotiate higher rent with an option to purchase in a commercial lease. However, depending on the terms of the agreement, your prospective tenants may have more than a couple of advantages. These include:
- Use of the property to determine if it meets their needs
- Purchase price set during lease execution
- Exclusive right to buy under specified conditions
Notably, an option to purchase differs from a right of first refusal. The latter means that the commercial tenant can only act if the commercial property owner decides to later sell the property. This also applies if a third party offers to buy it. If language asserting a right of first refusal appears in the lease agreement, the commercial landlord must first offer the sale of the premises to the tenant.
Recent Case Included Option to Purchase
Last month, the New Jersey Appellate Division decided 126 S. St. Owner, LLC v. Suzi’s Skin & Nail Care Studio, Inc. The case is unpublished and therefore does not represent precedential law. The ruling only applies to the named parties.
According to the facts of the case, the commercial landlord and tenant entered into a rather detailed lease agreement. They executed a Letter of Understanding (LOU) for a five-year lease with a five-year option to renew. Additionally, the rental agreement gave the tenants the sole option to purchase the property as long as they did so before the end of the second-year lease term.
The tenant did not exercise the option to purchase. A few months prior to the end of the lease term, the landlord informed Suzi’s Skin & Nail Care Studio of its intent to sell the property to 126 S. St. Owner, LLC.
All things considered, the option to purchase did not represent the real issue in this matter. The dispute evolved into claims resulting in the removal of the tenant for failure to pay rent in accordance with the lease agreement.
In the meantime, commercial landlords can take a lesson from this case. An option to purchase clause acts to close some deals. However, the option to purchase does not necessarily need to coincide with the entire lease term.
In this particular matter, the commercial tenants agreed that they would make a decision regarding buying the property within two years of their five-year lease. This gave the landlord the benefit of negotiating a price for the property.
Since the tenant did not exercise the option to purchase after the two-year period, the landlord could accept another buyer’s offer without waiting for the lease to expire.
When a commercial landlord executes a lease with a tenant, experienced legal advice becomes paramount. Whether they are short or lengthy, commercial lease agreements require language that carefully reflects the understanding between the parties.
Do you own commercial property and contemplate adding an option to purchase as part of a lease agreement? The Law Offices of Lawrence M. Centanni can help. Call us to schedule an appointment to learn more.