Today’s post, the sixth in our series on commercial real estate lease fundamentals entitled “The ABCs of Commercial Real Estate Leases”, is on Purchase and Relocation Options, two more important options commonly found in commercial real estate leases.
Purchase Options, Defined
A Purchase Option is the right granted to a tenant to purchase a building (typically the building in which they are currently in occupancy) at a specified time in the future and for a specified price.
Example of A Purchase Option
To help you become more familiar with Purchase Options and the terms they often include, here’s an example of a Purchase Option, taken directly from an actual lease:
Addendum D – Right of First Offer: In the event at any time or from time to time during the term of this Lease, Landlord desires to sell all or any part of Landlord’s Parcel to any person or entity and provided Tenant is not in default under any of the terms and conditions of this Lease, Landlord shall notify Tenant in writing and offer to sell the same to Tenant at a purchase price to be specified by Landlord in such notice. Tenant shall have thirty (30) days from and after the receipt of such offer to accept the same by written instrument delivered to Landlord within such period, time being of the essence. If Tenant accepts such offer, the sale and purchase shall be closed and consummated on the terms and conditions set forth in Landlord’s offer within sixty (60) days after Landlord’s receipt of Tenant’s acceptance and this Lease shall terminate as of the date of closing. If Tenant fails to accept Landlord’s offer within the time period set forth above, Landlord shall have the right to sell the same to any third party, provided (i) such sale shall be closed and consummated no later than eighteen (18) months after date of submission of Landlord’s offer to Tenant and (ii) the purchase price shall be no more than 10% less than the purchase price contained in the offer submitted to Tenant. Any such sale to a third party shall not affect Tenant’s rights to use and occupy the Parcel pursuant to the terms and conditions of the Lease except that upon the closing of such sale, the right of Tenant set forth in this Section shall be extinguished and of no further force or effect. If Tenant fails to accept Landlord’s offer with respect to the sale and the sale to a third party is not closed within the time period set forth above, Tenant’s right of first offer shall survive and affect any sale during the term of this Lease. However, the right granted to Tenant by this Section shall not bind Landlord or encumber Landlord’s Parcel after the expiration or termination of this Lease.
An Important Tip About Purchase Options
Note that in this example, the option is granted in a stand‐alone addendum and is not imbedded in an obscure section or area of the Lease, but the title of the Addendum would not provide the reader with any clue that this is a Purchase Option. In fact, the title would immediately make the reader think it is a Right of Offer to lease additional space which is the traditional definition of “Right of Offer”. So, again, it is important to read all sections of the Lease thoroughly to know what is actually being covered within the section.
What To Look For
Using the above example, here’s some important information to look for in Purchase Options:
- Notification requirements: Landlord to notify Tenant and provide purchase price within the offer. Tenant to exercise within 30 days from and after receipt of Landlord’s offer.
- Effective Date: Sale must be closed and consummated within 60 days after Landlord’s receipt of Tenant’s acceptance.
- Who has the option: The Tenant
- Identify the space: The option is for All or any part of Landlord’s Parcel
- Time constraints, if any: Tenant to exercise within 30 days from receipt of notice; Sale between Landlord and Tenant shall occur within 60 days of Tenant’s acceptance; if Tenant does not accept, Landlord may sell to a 3rd party with that sale closing within 18 months from submission of Landlord’s offer to Tenant. If sale to a 3rd party is not closed with these requirements, Tenant’s Purchase Option rights shall survive.
- Purchase price and timing of installments, if applicable: Price is to be stated in Landlord’s offer to Tenant.
- Other: If Tenant fails to exercise, Landlord has the right to sell the same to any third party provided (i) sale shall close no later than 18 months after submission of Landlord’s offer to Tenant and (ii) the purchase price shall be no more than 10% less than the purchase price contained in the offer submitted to Tenant.
Relocation Options, Defined
A Relocation Option is an option granted to a landlord (usually, but occasionally granted to a tenant) to change the location of a tenant’s premises upon notification to the tenant within a certain time period prior to the relocation date. In most cases, the landlord is responsible for all costs associated with relocating the tenant and improving the new premises. In addition, some leases provide restrictions as to the location in the building to which the tenant may be relocated, the layout of the relocation premises or the number of times during the lease term during which the landlord may exercise its option to relocate.
Example of A Relocation Option
- Landlord’s Right to Relocate Tenant. Landlord shall have the right, at its option, upon at least thirty (30) days’ prior written notice to Tenant, to relocate Tenant and to substitute for the Premises described herein other space in the Building, at least one floor above the Premises, containing at least as much rentable area as the Premises and having a comparable view and elevator access. Such substituted space shall be improved by Landlord, at its expense, with improvements at least equal in quantity and quality to those in the Premises. Landlord shall pay all reasonable expenses incurred by Tenant in connection with such relocation, including but not limited to costs of moving, door re‐ lettering, telephone relocation and reasonable quantities of new stationery. Upon completion of the relocation, Landlord and Tenant shall amend this Lease to change the description of the Premises and any other matters pertinent thereto, except Base Rent shall not be amended. Landlord shall use reasonable efforts to minimize the disruption to Tenant’s business during the relocation.
What To Look For
Referring to the example above, here are some of the more important things to identify in Relocation Options:
- Notification Period: 30 days prior
- The time frame in which the option is effective: In this case, this is silent.
- Who pays the relocation costs: Landlord
- Any restrictions to the relocation: Substitute Premises must be at least one floor above the Premises
- Is it a one‐time right: Silent
- Does Tenant have the right to relocate, or is it solely the Landlord’s option: Landlord option
- Where will the relocation space be located? Any other space in the Building, at least one floor above the Premises.
- Can either party terminate if the relocation space is not acceptable? Silent, so assume no.
- Can rent be increased if the relocation premises are larger than the original premises? No, Base Rent shall not be amended.
And there’s your overview of Purchase and Relocation Options. We have one more post on Options coming up, as well as more posts on the basic components of commercial real estate leases. If you have any questions, suggestions or comments on this or any of our other posts, feel free to email us at info@realogicinc.com. We always enjoy hearing from our readers.
Also, if you’d like to learn more about commercial real estate leases, there’s a thorough primer on leases called “The ABCs of Commercial Real Estate Leases” in the Library section of our web site. We also suggest reading some of our previous posts on commercial real estate leases. The topics covered include: Rent and Recoverable Expenses; CPI in Commercial Real Estate; Percentage Rent; Pro Rata Share; and Gross Up. Happy reading!
By Terry Banike, Marketing Manager, Realogic