Understanding the Implications of Purchase Options in Commercial Leases

Posted On Oct 19, 2017 / by / News

In commercial lease negotiations, it is not uncommon for prospective tenants – particularly those who are experienced real estate developers – to seek to negotiate an option to purchase the property. While these purchase options can incorporate a range of terms and conditions, at their core they are fairly straightforward: At a point in time, the tenant can elect to purchase the leased premises at a price either stated or calculated according to a formula set forth in the lease.

Under the right circumstances, purchase options can have benefits for both landlords and tenants. However, including a purchase option in a commercial lease will often be most favorable for the tenant. This scenario manifested itself in a recent case where attorneys George McArdle and Xavier Franco represented a commercial tenant in a long-running dispute with the owner of a warehouse in a booming commercial district.

McArdle Franco PLLC Attorneys Negotiate Purchase Below Stated Option Price

The case arose out of the lease of a large, dilapidated commercial property that the tenant (our firm’s client) intended to transform into a nightclub and lounge. Although the landlord represented that it would rehabilitate the property, it failed to do so, and as a result, the property sat vacant and unimproved for years.

After several rounds of settlement negotiations and litigation, our client sought to force the purchase of the property under the lease’s purchase option. It also sought to discount the purchase price based on various allegations raised in the course of the parties’ dispute. Ultimately, the parties settled on a closing price of $1.75 million – far below the $2.176 million purchase price stated in the lease, and far below the current market value of the property

Considerations for Landlords and Tenants in Purchase Option Negotiations

When negotiating purchase options in commercial leases, there are several key considerations that both landlords and tenants need to keep in mind. For example:

  • How should the purchase price be calculated? Does a fixed price make sense in light of market factors, or are the parties willing to agree on a formula for future calculation?
  • What consideration is to be paid for the option? What is reasonable in light of the option price and the duration of the option period?
  • What are the tax implications of including a purchase option?
  • How could the purchase option impact future litigation (or vice versa)?
  • Is the enforceability of the purchase option subject to the faithful performance of other lease obligations, and if so, are there cure periods that would preserve the option?
  • How are the landlord’s obligations tied to the value of the purchase option, and what can be done to mitigate the risk that the landlord will fail to perform those obligations.

Contact the Real Estate Attorneys at McArdle Franco PLLC

McArdle Franco PLLC is a transactional and litigation law firm located in Coral Gables, FL. Our attorneys bring decades of legal and business experience to representing clients in complex commercial lease negotiations and disputes. To inquire about representation, please call (305) 442-2214 or get in touch online today.