Lease With Option To Buy Commercial Property
Maybe you leased some space that didn't work for your business because you felt like you couldn't afford an upgrade. The forgone gain might be the equity you would have built in the property if you owned the space. Or it could be the negative impact on top-line growth, either through operational inefficiencies resulting from your real estate, or space challenges hindering scaling your business.
lease with option to buy commercial property
A lease-to-own contract is a type of commercial real estate transaction where a tenant commits to renting property for a predetermined amount of time, with the option to purchase it at the end of the lease.
A lease purchase contract stipulates that a lessee is obligated to purchase the property at a future date. The purchase price is negotiated as part of the contract and is either locked in at signing or determined at lease expiration, based on current market value.
The first critical negotiable point is the option fee. A non-refundable option fee is typically paid upfront by the lessee (eventual buyer) to the owner for the option to buy the property at a future date. The fee is negotiable but traditionally ranges from 1% to 10% of the future purchase price.
Depending on the terms of the contract and the type of commercial real estate lease agreement, the tenant and owner will have varying levels of responsibilities. Therefore, any maintenance, repair, and TICAM expense requirements must be clearly delineated in the contract to avoid misunderstandings or hidden costs.
In many lease-to-own transactions, a portion of each rental payment is applied to the principal. Since you'll be paying rent throughout the lease term at a higher than market rate, this helps incentivize the tenant to buy the building at the end of the lease. For example, let's say you pay $5,000 in rent each month for 5 years. If you pay a 10% lease premium applied to the principal at the end of the term, you will have accumulated $30,000 in rent credit towards the property.
DEFAULTS. Tenant shall be in default of this Lease if Tenant fails to fulfill any lease obligation or term by which Tenant is bound. Subject to any governing provisions of law to the contrary, if Tenant fails to cure any financial obligation within days (or any other obligation within days) after written notice of such default is provided by Landlord to Tenant, Landlord may take possession of the Premises without further notice (to the extent permitted by law), and without prejudicing Landlord's rights to damages. In the alternative, Landlord may elect to cure any default and the cost of such action shall be added to Tenant's financial obligations under this Lease. Tenant shall pay all costs, damages, and expenses (including reasonable attorney fees and expenses) suffered by Landlord by reason of Tenant's defaults. All sums of money or charges required to be paid by Tenant under this Lease shall be additional rent, whether or not such sums or charges are designated as "additional rent". The rights provided by this paragraph are cumulative in nature and are in addition to any other rights afforded by law.
OPTION TO PURCHASE. Tenant, upon satisfactory performance of this lease, shall have the option to purchase the real property described herein for a purchase price of , provided that the Tenant timely executes the option to purchase and is not in default of the Lease Agreement. Thereafter, each of the parties shall promptly execute any and all further instructions or other documents including a Sale Agreement which may be reasonably required. for purchase of the real property.
EXCLUSIVITY OF OPTION. This Option to Purchase Agreement is exclusive and non-assignable and exists solely for the benefit of the named parties above. Should Tenant attempt to assign, convey, delegate, or transfer this option to purchase without the Landlord's express written permission, any such attempt shall be deemed null and void.
REMEDIES UPON DEFAULT. If Tenant defaults under this Option to Purchase Agreement or the Lease Agreement, then in addition to any other remedies available to Landlord at law or in equity, Landlord may terminate this Option to Purchase by giving written notice of the termination. If terminated, the Tenant shall lose entitlement to any refund of rent or option consideration. For this Option to Purchase Agreement to be enforceable and effective, the Tenant must comply with all terms and conditions of the Lease Agreement.
As with any legal contract, Commercial Leases will not be legally binding until all parties have signed. Different from a Commercial Lease With Option To Purchase template or blank PDF file that you may discover elsewhere, your rental contract comes with the option of Document Defense, so an attorney in our network can assess the situation and take action if you don't receive payment or face any other issue.
Typically this kind of agreement provides what are referred to as cross-default provisions to ensure that a breach of one of the agreements will result in an automatic breach of the other. As the tenant-buyer has contracted to purchase the property in the context of a Lease Purchase, oftentimes the lease will provide that the tenant-buyer is responsible for maintenance and repairs which are typically the duty of the landlord.
A key distinguishing factor of the Lease Option is that the agreement does not obligate the tenant to purchase the property, but does obligate the seller to sell the property if and when the tenant properly exercises the option to purchase.
Both the Lease Purchase and Lease Option create landlord-tenant relationships. Therefore, if the tenant defaults, the landlord-seller would evict the tenant-buyer or tenant-option holder like a normal tenant. An issue that may arise in the context of an eviction of a tenant to a Lease Purchase or Lease Option is an equitable interest claim. Although not typically successful, a tenant may assert an ownership interest in the subject property, which is grounded in the idea that a Lease Purchase or Lease Option is essentially the equivalent of a sale, similar to an installment land contract (or contract for deed), whereby the seller retains title to the property as security until the balance is paid by the buyer. If an equitable interest argument prevails, the landlord-seller will be required to remove the tenant by way of foreclosure action, as opposed to a more simple eviction.
A commercial lease agreement with an option to purchase, also known as a lease option, is a form of commercial real estate contract in which the tenant and the property owner agree that there is an option for the tenant to buy said property at the end of a stipulated rental period. The agreement usually specifies the period within which the tenant has an opportunity to purchase the rented property. The parties agree on the following:
Depending on the circumstances, the legal agreement or contract may or may not include a set price. When it does, however, the price might be a value agreed upon or the value appraised at the time of purchase. During lease option contracts, the intention of the parties plays a significant role. In several court rulings, the judges have always relied on the parties' intentions in determining whether a lease option transaction can be treated as a sale rather than relying on the economic tests.
The lease option is usually upheld if, at the point of entering the deal, the parties believed that the rent charged reflected fair market rates and the option price took into consideration the future value estimate. Two elaborate factors manifest a tenant's acquisition of equity interest in a property. The first is that the sum of the option price and the rent payments must approximate the property's fair market value. Secondly, there must be evidence of rent payment in excess of the current property's fair market rental value.
As a tenant with a lease option, there are numerous benefits that you get once you enter into a commercial lease agreement with your landlord. First, the property will require repairs from time to time. In such cases, you may strike some creative deals and, subsequently, apply the value of the work against the purchase price. Secondly, the lease option gives you time to save up a down payment without losing the property. Thirdly, your lease agreement is valid as long as it is agreeable to the landlord and, as such, you don't have to move out of the property. Finally, the lease option allows you to resolve your credit problems to qualify for a traditional mortgage.
You could be a newbie in the real estate industry or a seasoned commercial real estate mogul in need of a business lawyer to handle your legal issues. If you need help with issues to do with a commercial lease agreement with an option to buy, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of the lawyers on its site. The lawyers on UpCounsel come from law schools such as Yale Law and Harvard Law and have practiced law for about 14 years, including work with/or on behalf of companies like Menlo Ventures, Airbnb, and Google.
A lease with an option to purchase, also known as a "lease option," is a common real estate arrangement. The important income tax question in lease-option transactions is whether the tenant is leasing the property or, as an economic reality, an installment sale has occurred prior to the tenant exercising the purchase option.
The answer to this question depends upon an analysis of all the surrounding factors, because no single factor determines whether or not a lease option is, in economic reality, a sale. As Gerald J. Robinson, a noted tax authority, observed in the Federal Income Taxation of Real Estate, a determination includes studying many factors, "including the terms of the lease, the surrounding economic circumstances, and the intent of the parties....A collection of telltale signs leads to the conclusion that exercise of the option was virtually certain from the outset, so that treating the entire transaction as a sale is warranted." 041b061a72