Commercial Lease-to-Own Agreements: Lease Purchase v. Lease Option; Key Terms; Buyer and Seller Risks and Benefits

In a volatile commercial real estate market, where purchasing commercial real estate may be financially out of reach for many businesses, commercial lease-to-own transactions provide an alternative with certain benefits and risks for owners and tenant/buyers.

Two common types of commercial lease-to-own agreements are lease purchase and lease option agreements. A lease purchase agreement is used when the tenant agrees to rent the property for an agreed-upon period and to purchase the property by a certain time. Whereas the lease option agreement gives the tenant the right to purchase the property during a defined period of the lease although they are not obligated to do so.

Lease-to-own agreements have unique considerations for owners and tenant/buyers such as the terms under which the tenant/buyer has the right to purchase the property including when the purchase must be made (or in the case of an option, when the option must be exercised); how much of the rent will be credited toward the eventual purchase price; and who is responsible for maintenance and repairs (which may differ from a traditional lease in that the tenant/buyer has an interest in the ongoing condition of the building they will be purchasing and, therefore, may take on more responsibility for maintenance/improvements). How certain terms are defined may also have tax implications for the parties.

Listen as our expert panel discusses the benefits and risks of lease-to-own agreements for owners and tenant/buyers and addresses key terms and drafting considerations.