Article: Law & Finance
Options And Refusals With Frank Newman
Property agreements are the domain of the legal fraternity but having a basic knowledge of the clauses that are commonly used when purchasing real estate is pretty useful, if not essential. Here’s an example of two agreements commonly used by commercial tenants (usually) to secure an opportunity to buy the property they lease.
Option To Purchase Agreement
In general terms an option agreement involves one party giving another party the right (but not the obligation) to purchase something at a specific price on or before a specified date. An option to purchase can be used in any manner of situations but in the case of a commercial property typically the landlord gives their tenant the right (but not the obligation) to buy the property they occupy on terms and conditions already agreed at the time the option was entered into.
This agreement gives the tenant an interest in the land which can be registered as caveat on the title. This then protects the option holder against the land being sold without the opportunity to exercise their right.
The key points with an option to purchase are:
• All of the terms are negotiated up front, including the price or the price formula.
They may agree for example that the price is to be registered valuation in say
three years time; but it could be any sort of agreed formula.
• The party receiving the option pays “consideration” for that right. How much that
payment is open for negotiation between the parties – it could be as little as $1.
The disadvantage to the property owner is the fact that by granting an option they have compromised their property rights. In some cases that may not be of significance or it may be something they are prepared to trade-off to secure the tenancy agreement on the agreed terms.
Right Of Refusal
If an option to purchase does not suit the parties then an alternative is granting a tenant what is called a first right of refusal. This gives the receiving party a pre-emptive right to buy should the property owner decide to sell.
The right to purchase would be triggered when the property owner announces their intention to sell, and advises the terms of the sale. The party holding the right then decides whether they are willing to buy on those terms. If they decide not to buy the property owner is at liberty to sell the property to a third party on the same terms or better.
If the third party agreement is on terms more favourable than the terms first offered to the right holder then the property must be reoffered to them at the more favourable terms. If the property is not sold then the pre-emptive right would survive and come into play until it is offered for sale again in the future.
Unlike the option to purchase, a first right of refusal does not give rise to an interest in the land and therefore cannot be registered against the title as a caveat. There is also no “consideration” required so no price for the right need be negotiated.
Of the two approaches mentioned, the right of first refusal is the more common, and sometimes demanded by tenants when entering into a commercial tenancy agreement. This at least gives the tenant peace of mind that they can secure the property and their long-term occupation of the site, which would prevent what could be a costly relocation should their new landlord decide not to renew their lease (it is conceivable for example that a new landlord may be a competitor wanting to acquire the location for their own operations).
Most landlords are more receptive to a first right of refusal than they are to granting an option because they have greater control over the timing and conditions of sale.
Although a right of purchase agreement can be separate from a tenancy agreement, having the right as a clause in the lease document makes the tenants interest more visible to any party undertaking due diligence on the property purchase.
