Lease Option

In depth

A lease option is two contracts in one: a lease and a separate purchase option. The tenant pays rent, plus often an upfront option fee that may apply toward the purchase price. The tenant chooses whether to exercise the option; the landlord must sell if they do. Misconception: many treat lease options as ownership; the tenant has no equitable title until the option is exercised. Practically, lease options are used by buyers who need time to repair credit, by sellers who want to test a buyer before committing, and to avoid Dodd-Frank in some structures, although the safe-harbor analysis is fact-specific. Courts can recharacterize a lease option as a disguised installment sale if the economics tilt heavily toward purchase. Always record a memorandum of option.