WORD OF THE DAY - Lease Option

A lease clause that gives the tenant the right to purchase the property under specified conditions. Following are some important features of a lease option:

*It usually runs with the land, so that if the lease is assigned, the option to purchase is likewise assigned.
*Usually it does not extend beyond the term of the lease.
*The supporting consideration can be the paid rent. A default in rent may result in termination of the option.
*It can be assigned separately from other provisions in the lease.

The lessor/optionor must be careful to structure the transaction so that the economic reality of the transaction makes it a lease rather than an outright sale. For example: If the total payments under the lease are substantially equal to the purchase price payment under the option, and if the payments are applicable to the purchase price, the IRS may characterize the deal as a sale because the lessee has no other economic choice but to exercise the option.

An option in a lease is inseparable from the integrated lease contract, and therefore an extension of the lease usually prolongs the life of the option, unless the lease states otherwise.

In addition to an option to purchase, other lease options include options to renew and options to extend. Under the latter, the original lease is continued on the same terms, including the extension provision. With an option to renew, the lessee is entitled to a new lease on set terms, not including the original renewal provision.