Land Purchase Options

It’s not infrequent that commercial tenants have options in their leases to purchase either contiguous property or even the subject matter property of the Lease.  The issue is: What can be set out in the option at the time of its creation that makes the option fully capable of being enforced?

There is a relatively simple process to eliminate this disadvantage to the “Tenant” who holds the “option to purchase”.  The document comprising the option can expressly state what the option amount should be by way of a ratio to a third party purchaser or alternatively a purchase price which is good for a period of time and thereafter subject to an index such as the consumers price index.

It is equally conceivable that the land owner who is subject to an option to purchase in favour of his tenant, may never have had the option registered on title and might very well sell the property to a third party who, of course, takes subject to the Lease on the property where there is actual notice that the Lease exists.

That is hardly secure for the Tenant of property which includes an option to purchase.  Valuation is always critical with respect to exercising an option to purchase.

The Take-away:  My suggestion is that the option expressed in the principal document (Lease or other business relationship) sets out precisely what the terms for exercising the option are and the terms for the purchase of the optioned lands, possibly using a factor or a multiple of the existing Lease and at the minimum some form of correlation to the method of calculating the value of the principal property that is under Lease using square footage.  Simply leaving the price and payment requirements to be determined later merely exposes the option to abuse.

We’ve had too many cases where the option grants to the Tenant the right to purchase but the land owner demands far more than realistic.  Options should specify fully what it is to mean and how much.

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