Right of Assignee or Sub-lessee to Enforce a Purchase Option

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 What Is a Residential Lease?

A residential lease is an agreement where a property owner (i.e. a landlord), contracts with an individual (i.e. a tenant) to grant them the exclusive possession of a piece of real property. In most residential leases, a landlord retains what is known as a reversionary interest in the real property. A reversionary interest means that at the end of the contractual lease term, the real property returns to the possession of the landlord.

A typical residential lease lasts between 6 and 12 months. However, some residential leases may last for an indefinite period of time. Residential leases also come in many different forms. Examples of the most common types of residential lease arrangements are:

  • Term for Years: A term for years is a residential lease that ends after a contractually defined period of time. For example, a residential lease may end after 6 months or after 12 months.
    • Importantly, a tenant does not need to give their landlord notice before vacating a residence. This is because residential leases for a term of years automatically end at the specified date;
  • Tenancy at Will: Tenancy at will lease arrangements are relationships where the tenancy of the property only lasts as long as the parties agree for the tenancy to continue.
    • Typically, a tenancy at will is an informal relationship, such as allowing a friend to stay over, as opposed to a contractual relationship; and
  • Periodic Tenancy: Periodic tenancy is an arrangement where the tenant possesses a property indefinitely, until the tenant informs the landlord that they wish to terminate their possession.
    • Periodic tenancy arrangements can either be created expressly or by implication, such as when a lease does not include terms regarding the duration of the tenancy. In order to terminate a periodic tenancy, notice must be given to the landlord.

What Is A Commercial Lease?

A commercial lease is a specific type of real estate contract that is used when a commercial tenant rents space from a landlord. Similar to other types of real estate leases, a commercial lease gives a commercial tenant the right to occupy a piece of property.

Commercial leases also give the tenant the right to conduct business activities for a certain amount of time in exchange for making monthly rent payments to the landlord. The commercial lease also serves as a guide for both parties to reference regarding their legal rights and responsibilities associated with the use of the property for commercial purposes.

The most common example of a commercial lease would be when a tenant leases a piece of business property, such as:

  • An office space;
  • A restaurant; or
  • A retail store located in a strip center or mall.

Depending on the type of commercial lease that the parties enter into, the lease will provide instructions including which party is responsible for making repairs, and which party is liable for paying real property taxes on the space.

Although there are many differences between a commercial lease agreement and a residential lease agreement, the major difference between the two is the nature of the property that is being rented. For example, the terms of a commercial lease agreement address the requirements of operating and maintaining a business on the premises.

In contrast, a residential lease is drafted with terms that ensure the tenant will live in habitable conditions, and can enjoy their personal time and space while living there. Further, residential lease terms are created for the purposes of dwelling on the property, while commercial lease terms are created for the purposes of running a successful business on the property.

Some other examples of differences between the two include:

  • Commercial leases generally have longer rental and lease periods than residential leases;
  • Business tenants generally have less rights than residential tenants;
  • It is easier to evict a commercial tenant from a business property; and
  • It is significantly more difficult to break or amend the terms of a commercial lease in comparison to a residential lease, especially commercial leases with higher rental installments.

What Does It Mean to Assign a Commercial Lease?

Assignment of a lease refers to one party of a lease transferring all the interest and obligations of the lease to a third party. In the commercial setting, a commercial tenant will assign their interest in the lease to another commercial tenant. In addition to a commercial tenant’s right to assign a lease, landlords may also assign their interest in the lease to another landlord.

However, many commercial leases will include restrictions on the ability to assign a commercial lease. As such, it is important to review the terms of the commercial lease in order to determine if assigning the lease is possible. The written commercial lease agreement will note all of the rights that the commercial tenant maintains over the commercial property.

What Does It Mean to Sublet a Commercial Lease?

A commercial sublease occurs when a company transfers a portion of their lease rights to a third party for a specified and temporary period of time. Companies may either sublet a portion of their office space to a third party while continuing to work in the same space, or sublet the entire office location until the end of their specified lease or a period of time.

For example, if a company is seasonal, such as a holiday store, they may sublease their lease to other stores until the holiday period arrives. For example, a Halloween store may have a one year commercial lease, that they sublet for 9 months of the year in which their store is not operational.

It is important to note that when a company sublets the property, the original tenant (i.e. the sublessor) is still obligated to the landlord for all of the terms of the original lease. This means that the sublessor maintains what is known as “privity of estate” and “privity of contract” with the landlord. The sublessee (i.e. the person that utilizes the lease for a temporary period of time) is only liable to the original tenant for the lease, and not the landlord.

What Is a Purchase Option?

A real estate purchase option is a contract for a specific piece of real estate that allows a tenant or buyer of the property the exclusive right to purchase the property. By purchasing an option, a prospective buyer pays for the opportunity to exercise the purchase right for the property to be purchased within a specified time. If the purchase option is not exercised within the contractually specified time, the option will expire.

In addition to traditional purchase options, options may also be used as a right to renew a contractual lease agreement. A lease purchase option is a contract that provides for the lease of a piece of property with an additional right to purchase the property during or upon the expiration of the lease terms.

Can an Assignee or Sub-lessee Enforce a Purchase Option Contained in a Commercial Lease?

In short, it depends. Unless otherwise restricted by state law, the general rule is that a purchase option in a commercial lease can be freely assigned. Typically, most courts agree that the assignment of a commercial lease that contains a purchase option gives the new assignee the right to exercise the same purchase option. In contrast, most courts do not allow a sub-lessee the right to enforce a purchase option, unless the sublease agreement itself assigns the purchase option to the sublessee.

In the case of lease assignment, the idea is to transfer complete ownership of the lease from the original tenant to a third party. In other words, the third party takes over the same exact rights the original lessee had under the commercial lease. As such, if the original lessee had the right to a purchase option, the new assignee should be given that same right.

In the case of subleasing, there is no actual transfer of ownership. Instead a sublessee is merely occupying property that the original lessee is still contractually obligated to occupy and control. As such many courts do not allow a sublessee to exercise a purchase option, as that would conflict with the original lessee’s rights and contract.

However, the terms of the commercial residential contract will ultimately control the terms of the purchase options. As such, if the lease does not allow for assignment or subletting of the lease, then the assignee or sublessee will not be able to enforce the purchase option. This is because the original tenant will likely be considered to have breached the original agreement.

Can the Exercise of a Purchase Option Gained Through Assignment Be Restricted?

Yes, a court may restrict an assignee from exercising a purchasing option contained in a residential or commercial agreement if they feel the purchase option was intended only for the original lessee. Once again, the original contract will be a major factor in determining whether or not an assignee will be able to exercise a purchase option.

Additionally, enforcement of a purchase option may also be restricted if the assignment of the lease itself requires the consent of the original owner. Without obtaining the needed consent, the assignment itself will be considered void, and the assignor will likely be found to have breached their agreement with the property owner. In such cases, the assignee will not have any legal rights to the property, and may also be able to sue the assignor. In other words, a person cannot exercise a purchase option from a lease that was unlawfully assigned to them.

Do I Need a Lawyer for Help With Enforcing a Purchase Option?

If you are an assignee or sublessee and are wanting to exercise a purchase option that is contained in the lease on a property, you should consult with an experienced real estate attorney. An experienced real estate attorney will be able to help you determine whether or not the purchase option in your lease was assignable.

Additionally, an attorney will also be able to review your lease to determine how you may be able to enforce the purchase option. Finally, an attorney will be able to provide you with the best course of legal action if the original owner of the property attempts to block your right to purchase the property.

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