This article will describe some of the key considerations in drafting an option to purchase as part of a retail lease and addresses the typical option to purchase and not a right of first refusal or right of first offer. Unlike an option to purchase, both the right of first offer and first refusal leave the triggering of the tenant’s purchase rights in the hands of the landlord.

An option to purchase is occasionally added to a letter of intent (which might not even have the benefit of participation by counsel), after which the parties must negotiate a mutually acceptable provision. A purchase right typically is granted only to an anchor or credit tenant having the negotiating power to obtain such a right. Such purchase rights are often granted in a single-tenant, free-standing property. However, options and other rights to purchase can be included in a lease involving a shopping center, particularly with respect to pads, outparcels, and other like improvements that can be separately conveyed.

In order to avoid an “agreement to agree” that may not be enforceable, and thereby frustrate the interests of the tenant and also lead to potential litigation, the parties will be guided by case law and real estate practice involving both purchase and sale agreements and options to purchase. A well-drafted clause will set forth the purchase price, deposit (if any), type of deed, quality of title, closing date (including whether or not time is of the essence), remedies if either party defaults, and other critical provisions. If the purchase price is not specified, the parties must agree to a binding mechanism to determine the purchase price, such as binding appraisal, in order to avoid the agreement-to-agree issue referenced above.

If the parties successfully negotiate the list of specific provisions, they are then confronted with the issue of how to address the remaining provisions typically found in a purchase-and-sale document. From the landlord’s perspective, the landlord must be free to convey the property to a third party after giving the tenant the first opportunity. In order to be in this position, the landlord must avoid ambiguous provisions that could give the tenant the reasonable argument that the parties need either additional time to negotiate or guidance from a court in order to complete the missing provisions. In contrast, the tenant wants the benefit of its bargain; namely, a binding right to purchase the property if the tenant so elects.

One mechanism to address this issue is to include in the lease provision a “mini” purchase-and-sale agreement that, in addition to addressing the specific points highlighted above, contains sufficient additional clauses that make both parties feel comfortable closing the purchase and sale. We have accomplished this “mini” purchase-and-sale agreement in as few as three pages of text. Another approach is to attach to the lease an Option to Purchase Agreement that is negotiated in advance and is expressly referenced in the lease document as the agreement that will be utilized for the purchase and sale. The lease would state that the tenant must execute the option-to-purchase document as part of the mechanism by which the tenant exercises its right to purchase. Both parties, particularly the tenant as highlighted above, should avoid agreeing in concept to a purchase-and-sale transaction if this would entail protracted negotiations to craft the final agreement.

If the property involved in the option to purchase is part of a larger shopping center, the landlord must pay careful attention to issues that will arise as a result of the separate conveyance of only a portion of the project. Issues such as cross-easements, use restrictions, parking ratios, maintenance, and other provisions typically included in a cross-easement document must be addressed. As a final point, the lease should state that the option to purchase may not be separately assigned apart from the lease.