We’ve been discussing options that commonly arise in real estate leases and purchase transactions.  Previously we dealt with option negotiation strategies.

AFTER THE OPTION IS NEGOTIATED

After the option is negotiated and time for the exercise of the option arises, the tenant can use the exercise of the option as a bargaining chip. Landlords generally want a continuation of their cash flow and do not want to have vacant a property and incur brokerage commissions for a new tenant. As a result, the tenant can use the exercise of an option as a bargaining chip for tenant improvements such as carpeting, painting, additional parking or other benefits.  Landlords often agree to modest tenant improvements if the tenant were to exercise the option. The resulting benefits to the tenant start at the commencement of the lease negotiations.

Leasing or Buying signpost with sky clouds background. File contains clipping paths

REAL ESTATE PURCHASE OPTIONS

In lease transactions, astute tenants may strive to negotiate an option to purchase the rental property during the lease term or immediately upon its expiration.  At times tenants can successfully negotiate a purchase option at a fixed price.  A purchase option provides tenants with a business opportunity in the event the real estate market appreciates.  Sometimes tenants have been successful in applying a portion of the rental payments as a credit toward the option price.

On the other hand, landlords strive to limit the purchase option right because such option limits the flexibility to sell the property thus decreasing the ability to obtain the highest and best price.  Before a landlord grants a tenant an option to purchase, serious discussions should be undertaken with the owner’s/landlord’s real estate agent and the real estate attorney.

Future blogs will deal with right of first refusal and a conclusion to this series of blogs on options as a strategic tool in the real estate negotiating process.

Lat J. Celmins

lcelmins@mclawfirm.com