Lease Option to Purchase Must Have Specific Terms

Question: We are leasing a small building in a Chandler industrial park for five years. After five years we want to have the option to purchase this small building in “as is” condition. Our broker says that this option to purchase only needs to be in a lease addendum that states that there will be an appraisal for the amount of the purchase price, and that we will purchase the industrial building in “as is” condition. We don’t want to spend a lot of time and legal fees now because whether we exercise this option to purchase will depend on how successful we will be in five years. Do we need more than the appraisal and the “as is” language in the option to purchase?

Answer: Yes. Any option to purchase must have specificity to be enforceable. In a 2017 Court of Appeals decision, 244 Ariz. 148, an option to purchase was not enforced because there were not enough specific terms in the option to purchase. For example, there was nothing in the option to purchase regarding the selection of an appraiser if the tenant and the landlord could not agree on an appraiser; when escrow was to close; the terms of the payment of the purchase price; any title exceptions; whether a general or special warranty deed would transfer title; and the name of the escrow company. The Court of Appeals ruled that the option to purchase was simply “an agreement to make an agreement,” because the key terms of any option to purchase by a tenant must be agreed upon at the time of the execution of the lease.

Bottom line: Your option to purchase in five years must be an enforceable contract that a judge could order be specifically performed, e.g., require the landlord to deliver a deed to you in exchange for your payment of the purchase price.

Note: If there are only one or two material terms missing in an option to purchase, or any other agreement, a court will still try to enforce the agreement. For example, although the close of escrow date is a material term, if a seller and buyer mistakenly omit a close of escrow date, a court will try to find a reasonable close of escrow date. In other words, if there is no close of escrow date for the purchase of a home, but most homes in that Chandler subdivision close escrow within 45 days, a court will probably require the seller and buyer to close in 45 days.