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Lease with Option to Purchase, NY

A Lease with Option to Purchase is a Lease that contains a method for the tenant to elect to purchase the property on or before a certain time period. There are usually payments, in addition to rent, that need to be made in order to keep the option open. These payments are used towards the ultimate purchase price, but are forfeited if the option is not exercised. An option to purchase is considered “time of the essence”, meaning that if the tenant does not exercise the option strictly, it will be forfeited, along with the option payments made. There may be some leaway for a tenant if the time delay is de minimus, and no prejudice has inured to the landlord.

Options to Purchase can be dangerous for both the landlord and the tenant. What a landlord needs to be concerned about, is that if the tenant is in breach, and a summary proceeding is necessary, the tenant may try to hold it up by claiming the option to purchase was breached by the landlord. the tenant brings an action in Supreme Court, it could stay the summary proceeding. In the meantime, the landlord may not be able to collect rent if the tenant is refusing to pay. A Supreme Court action could take many months. The tenant could also attempt to file a notice of pendency with the County Clerk, which would prevent the owner from selling the property to anyone else while the action is pending. On the tenant’s side, if they do not strictly comply with the lease, they may forfeit the sometimes substantial option payments.

A tenant may wish to have a Lease with Option to Purchase to give them the opportunity to build up credit, and make payments towards the purchase price over time. They may not have the ability to purchase outright. A landlord is being compensated for giving this option, because if the option is not exercised, he or she will be able to keep the extra payments as compensation.

I have seen parties craft their own Option to Purchase, without either side consulting an attorney. This is most likely to lead to problems, because the law of options is very specific, and needs to be known before entering into such contracts. Both the landlord and tenant would be wise to have their own separate counsel to advise them of the responsibilities, benefits and risks in entering into such contracts.

Cynthia M. Burke,

Categories: Real Estate Law