San Diego Lease With An Option To Purchase

When an option to purchase real property is included in a lease of property, certain added considerations apply, as well as some modifications of the general option contract rules.

The following are some of the added considerations:

  1. No separate consideration for the option is required to make it enforceable if the option is part of a lease. The tenant’s consideration in the lease in the form of rent is sufficient.
  2. When there is no separate consideration for the option, termination of the lease will also terminate the option.
  3. The rule against perpetuities probably does not apply to an option that is part of a lease, although California law is still unsettled on this issue.
  4. An assignment of a lease will also assign the option unless the option’s assignment is specifically prohibited, and, conversely, the option may be assigned separately from the lease unless that too is specifically prohibited.
  5. If the lease is extended or renewed by an agreement or by an option right in the lease, the option to purchase will likewise be extended or renewed if that was the parties intention.

An option to purchase in a lease is generally for a significantly longer term than is ordinarily the case in nonlease options. The option might not even become effective until some portion of the lease term has expired. Thus, the parties may be unable to establish the purchase price for the property at the tie the lease is executed, and some mechanism such as a formula or appraisal may be necessary.