Dec 05, 2014

Lease Terms That Give You Options

By Don Catalano


Commercial Real Estate Lease TermsOne of the best answers to the classic question of whether you should lease or buy is to negotiate lease terms that give you the ability to do both. Options to extend your lease give you some of the stability of ownership by letting you stay longer than your initial term. If you want even more control, negotiating an option to buy can put you in control of the building if you want it or if you want to stop someone else from purchasing it. On the other hand, it also lets you avoid the costs and responsibilities of ownership if you are not yet ready to take them on.

Option to Buy

The most powerful option is the pre-negotiated option to buy. While lease terms can vary, this structure gives you a predetermined right to buy the property. Some are set up as lease-to-own transactions where you may actually pay extra funds towards the principal and have a set period of time to purchase, usually at a preset price.

Another slightly more flexible structure is when you have a purchase option that comes with no up front cost or direct commitment. Under this structure, your landlord agrees to give you the right to purchase the building. Frequently, it will have an expiration date and it will have a prenegotiated price or a pre-set method for determining the price. However, under these lease terms, you aren't obligated to purchase if you don't want to and you aren't spending any money that you could end up losing.

Right of First Refusal

If you cannot negotiate lease terms that include a direct option to purchase, you can always try to negotiate a right of first refusal. This clause says that if your landlord chooses to sell the building and gets an offer, he has to give you the chance to match the offer before selling to the other buyer. If you can match its price and terms, you get to buy the building instead of the buyer.

Rights of refusal are better than nothing but can be challenging for both you and the owner. For the owner, they are a cloud hanging over any sale of the building. Buyers know that their offer could be effectively snatched away by you. For you, the problem with the right of first refusal is that you only get to exercise it if the owner chooses to sell. He remains in the driver's seat.

Right of First Negotiation

Your least powerful -- but easiest to get -- option is the right of first negotiation. When you include these lease terms, your landlord is obligated to go to you before starting the sales process. In other words, you get the first crack at negotiating a deal. If you can't make a deal work, though, the owner is free to proceed with the marketing process with whoever he wants, even if that buyer ends up paying less than you were willing to. As such, while this power is better than nothing, it still leaves you with the lowest level of control.


Here are a few articles to check out:

Commercial Office Leasing 101

Six Office Lease Terms To Avoid

8 Commercial Real Estate Terms You Should Know


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Don Catalano

Don Catalano