Also found in: Acronyms.
A contractual arrangement in which the tenant is given the right to buy the leased property under certain circumstances.An option is a right to buy,even if the seller later changes his or her mind and does not wish to sell to anyone at all.Contrast with a right of first refusal, which is the right to buy if and when the owner ever decides to sell.
Persons negotiating the terms of a lease option should consider the following:
1. Do you mean to grant an option or a right of first refusal? Be specific; call it by the right name and then describe what happens if the landlord wishes to sell to someone else.
2. What are the earliest and the latest dates on which the option can be exercised?
3. If the option can be exercised any time during the lease term, does it continue if there is a renewal or an extension of the lease? Renewals are new leases. Extensions are continua- tions of old leases.
4. Can the tenant sell the option to someone else without also assigning the lease to some- one else? If not, may the tenant at least sell the option to another entity in which the ten- ant (or specifically named person) is a controlling or 100 percent shareholder?
5. Will the price be set in the agreement, will the parties agree to a fair market value (usual- ly a bad idea because of the almost certainty of arguments), or will the parties agree to a formula that employs some index that is independent and easily verifiable?
6. What events will allow the option to be terminated by the landlord, even if the lease con- tinues? This could be late payment of rent, the tenant's failure to cure a nonmonetary default after notice by the landlord, or any other factors the parties may negotiate.