Standard Lease Option Contract

The renter has discretion to purchase property under a lease option contract.

A lease option contract is a rental agreement with an option for the tenant to purchase the property upon the expiration of the rental term. Because lease options are contracts that can be negotiated between the parties, the terms of each lease option contract can vary from one to the next. However, a few concepts and principles are common among most lease option contracts.

Lease

A lease is a rental agreement, meaning a temporary agreement for a tenant to occupy and use real property for a defined period of time. Rental terms can be anywhere from one month to several years. Most lease option contracts limit the rental term to about one year, but again, this is something that can be negotiated between the parties.

Purchase Option

The "option" portion of the lease option contract refers to the tenant's option to purchase the property if the tenant wants to. As the name implies, the tenant is not obligated to purchase the property. However, the landlord is obligated to sell the property to the tenant if the tenant exercises the option. The tenant has an option, but not the landlord.

Payments

Lease option contracts involve at least three types of payments from the tenant to the landlord. First, the tenant generally has to make an upfront option payment to the landlord. This payment is consideration for the tenant's right to the option. Then, the tenant will have to make rental payments, which are generally monthly payments or sometimes annual payments. Finally, if the tenant exercises the option then the tenant will have to provide a final payment equal to the purchase price of the property.

Deadlines

Most lease option contracts include specific deadlines for when the tenant must make the option payment, when the tenant must inform the landlord of whether the tenant will exercise the option, and when the tenant must pay the full purchase price for the property. A tenant's failure to meet those deadlines could result in a breach of the rental agreement or could result in a loss of the tenant's option right.

Purchase Price

The standard lease option contract also includes a set purchase price for the property. That way, if home prices rise during the leasing period then the tenant can exercise the option and purchase the property at the already-agreed-to price. The tenant does not risk having to pay more for the property. Of course, if market prices go down then the tenant can decide not to exercise the option unless the landlord agrees to a reduced purchase price.

References

• "Real Estate Finance Law"; Grant S. Nelson and Dale A. Whitman; 2008