Tenants are sometimes able to negotiate an
option to purchase in connection with their lease. Occasionally
they are even able to negotiate a provision that all or a
portion of the rent payments will apply to the purchase price.
Options of this kind are most commonly found in leases of
single-user improved property, such as restaurants or manufacturing
plants, or in leases of single-family residential properties.
This can be an important and valuable provision for the tenant,
especially if he has a special need for the particular property.
If the landlord fails to honor the option, the tenant has
to look to his legal remedies. Generally, the tenant has two
kinds of remedies available in which the landlord breaches
an option: (1) damages, and (2) specific performance. Unless
the tenant has one or both of these remedies available, the
option is nothing more than an illusion that depends solely
on the good will of the landlord.
If the tenant seeks to recover damages, he is entitled to
recover the difference between the option price and the fair
market value of the property at the time the option is exercised.
In some cases, this is an adequate remedy. In other cases,
however, this is totally inadequate, particularly if the tenant
has a special need for the property. Damages are also inadequate
when the option price is the same or higher than the market
price because in the eyes of the law there are no damages.
Therefore, it is critical for the tenant to have specific
performance available as one of his remedies.
Specific performance means that the court orders the breaching
party to perform the contract as written. If he does not,
the court can enforce its order by the contempt power--that
is, the court can put the party in jail until he complies
with the court's order. This is usually enough to persuade
a reluctant landlord that he should comply with the terms
of the option.
Unfortunately, the tenant's efforts to obtain specific performance
to enforce his option are often frustrated. The reason is
usually that the option is legally incomplete. In order to
qualify for specific performance, an option must contain all
the essential terms of the deal. The courts like to say that
they will not write a contract for the parties, which means
that they will not order a party to perform a contract unless
all the material terms of the contract are specified.
This kind of legal deficiency is usually not a problem when
the parties enter into a contract for sale, as opposed to
a lease. The parties to a sale typically go to great lengths
to write out all sorts of detailed provisions: who pays the
closing costs, how any deferred balance of the purchase price
is to be structured, whether there are any warranties and
if so what they are, who is responsible for risk of loss prior
to the closing, what the status of title is to be, and so
on. As a result, specific performance is usually available
to enforce a sales contract. On the other hand, when the parties
insert an option in a lease, there is a tendency to specify
little more than the price, payment terms, means of exercise,
and closing date. For whatever reason, the parties to a lease/option
contract often seem to leave out many of the important details
found in a real estate purchase contract. As a result, they
often lose the remedy of specific performance.
The failure to specify all the details does not necessarily
mean the option is unenforceable, however. If the major terms
are specified, there could be enough to sustain an action
for damages, even though there may not be enough for specific
To make sure your option qualifies for specific performance,
include all of the things a purchaser and seller would normally
put in a real estate purchase. Clearly the price, payment,
terms, and the closing date must be specified. But this is
not nearly enough. The contract should also specify the condition
of title, type of deed, closing costs, warranties, indemnifications,
title insurance, prorations, and other typical terms found
in a sales contract. A good approach is just to do a separate
purchase contract and attach it to the lease as an exhibit,
stating that if the option is exercised, the terms of the
purchase contract will govern the sale.
If you are negotiating an option to purchase as part of your
lease, be certain to include all the terms you would have
in a purchase contract. Do not simply insert a short paragraph
specifying the price, terms, and closing date, or you risk
losing the important remedy of specific performance, and perhaps
even the remedy of damages, leaving you with an illusory option.
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