Pay attention to the wording of a purchase option or right of first refusal in a lease agreement

A purchase option and a right of first refusal are not synonyms. With a purchase option, you, as a tenant, can decide to buy the leased business premises yourself: if you exercise the option, a purchase agreement is concluded immediately. A right of first refusal does not grant you that unilateral right, but obliges the landlord to offer the property to you first when he wishes to sell. Which variant you include in your lease agreement for the business premises and how you formulate it determines whether you can actually become the owner later on or are left empty-handed.

Purchase option versus right of first refusal: what is the difference?

Commercial tenants increasingly wish to include an option in the lease agreement to acquire the property themselves in the future. Two different instruments exist for this purpose, which differ significantly from each other legally. The most important distinction lies in who takes the initiative: with a purchase option, this lies with you as the tenant; with a right of first refusal, it lies with the landlord.

• Purchase option: you decide whether and when to buy. By exercising the option, the purchase is concluded.
• Right of first refusal: the landlord decides whether to sell. If he does, he must first offer the property to you.

In short, the two clauses differ on four points:

• Initiative: in the case of a purchase option, this lies with the tenant; in the case of a right of first refusal, with the landlord.
• Certainty: a purchase option gives you a firm right to buy; a right of first refusal only gives you a first chance if the landlord decides to sell.
• Protection against sale to a third party: you get that with a right of first refusal, but not with a separate purchase option.
• Price: with a purchase option, the price (and its determination) is fixed in advance; with a right of first refusal, it often depends on the moment of sale or on an offer from a third party.

Because the consequences vary so much, careful wording is essential to prevent future disputes. If you are unsure which variant best suits your situation, have the clause reviewed by a lawyer before signing.

What is a purchase option?

If the tenant holds a purchase option, he may exercise the option to purchase the leased business premises. As soon as the tenant exercises the purchase option, a purchase agreement is immediately concluded. The conditions under which that purchase is concluded are set out in the purchase option. The purchase option therefore always states the price for which the purchase is concluded, the manner in which the tenant may exercise the option, and the term for which the tenant holds that purchase option.

The option effectively contains a binding offer to sell. The tenant's declaration that he is exercising the option is sufficient to create the purchase agreement. In that case, the landlord can no longer withdraw from it.

How do you fix the purchase price?

The price can be a fixed amount, but it is also sufficient that the price is sufficiently determinable. For instance, you can link the price to an objective measure, such as the current annual rental value or an appraisal by an independent expert. Through such a formulation, the purchase price can fluctuate with rent indexation. Case law has accepted that a price determination via a fixed calculation method can be sufficiently concrete, provided the outcome is objectively verifiable.

Please note: a purchase option is not a right of first refusal

It is important to realize that a purchase option does not oblige the landlord to offer the property to the tenant first. As long as the tenant does not exercise the option, the landlord is, in principle, also allowed to sell the property to a third party. If you specifically want to be protected against sale to someone else, you need a right of first refusal (or a combination of both).

What is a right of first refusal?

With a right of first refusal, the landlord commits merely to an obligation to make the property available at the moment he wishes to sell it. He must then first offer it to the tenant and give him the opportunity to purchase. Only when the tenant does not accept the offer may the landlord sell the property to a third party.

In doing so, the landlord must make reasonable efforts to bring about the saleon the agreed terms or at prevailing market prices and conditions. He may not simply withdraw and must give the tenant sufficient time to respond to the proposal.

What do you need to record regarding a right of first refusal?

Here too, it is important that the lease agreement clearly states:

• within what period the tenant must respond to the offer;
• how pricing is determined;
• what the consequences are if the landlord violates the obligation to offer.

A commonly used method is to link the market price to the bid a serious third-party prospective buyer is willing to pay for the property, so that the tenant can purchase under the same conditions. Whether this is tenable in a specific case depends on the exact wording and circumstances.

Purchase option or right of first refusal: which do you choose?

Which option suits you best depends on how much certainty you want and your position vis-à-vis the landlord. A few rules of thumb:

• Choose a purchase option if you are already certain that you want to buy the property in the future and you want to fix the price or price determination in advance. You then have a firm right that does not depend on the landlord's will.
• Choose a right of first refusal if you primarily do not want to sell the property to someone else, but do not yet want to commit to buying. You retain flexibility and still get a first chance in the event of a sale.
• Combine both if you want maximum security: a purchase option to buy yourself, plus a right of first refusal that protects you as long as you have not yet exercised that option.

Bear in mind that the landlord is generally more hesitant regarding a purchase option, as it restricts their freedom to sell more severely. Consequently, the choice is often a matter of negotiation.

Why purchase options and right of first refusal often lead to disputes

It is very important that the right of first refusal and the purchase option are properly formulated, as in practice this frequently gives rise to legal disputes. Common pitfalls include:

• No financing clause. If the tenant exercises the purchase option but subsequently fails to secure a loan, he remains bound to the purchase without a financing clause
• It is unclear what falls under the right. Do the leased movable assets (inventory, installations) also fall under the right of first refusal or the purchase option, or only the building?
• Transfer to a new owner. Does the tenant retain their purchase option or right of first refusal if the property and the lease agreement transfer to a new owner? Without a clear agreement, this is by no means always certain.
• Vague pricing and payment terms agreements. A price that cannot be objectively determined, or the absence of a response period, almost always leads to disputes.

Practical example

Suppose you rent a commercial property and agree on a purchase option at a “market-conform price,” without further elaboration. Three years later, you want to buy, but you and the landlord fundamentally disagree on what constitutes “market-conform.” Due to the lack of an objective calculation method or valuation procedure, the case ends up in court. Had the price been linked to an independent valuation or to a fixed formula based on rental value, you would likely have avoided this conflict. This demonstrates that the value of a purchase option stands or falls entirely with its wording.

Checklist: how to properly formulate a purchase option or right of first refusal

1. Make a conscious choice between a purchase option (you decide) and a right of first refusal (landlord decides), or combine both.
2. Establish the price or an objective price determination (fixed amount, valuation, or formula).
3. Determine the time limit within which you can exercise the option or must respond to an offer.
4. Include a financing clause if you are dependent on a loan for the purchase.
5. Clarify what is included: only the building or also movable property.
6. Arrange what happens upon the sale or transfer of the property to a new owner.
7. Record how you make the offer or exercise the right (for example, in writing or by registered letter), so that there is no dispute regarding whether and when you invoked the right.

Frequently Asked Questions

What is the difference between a purchase option and a right of first refusal?

With a purchase option, you, as the tenant, decide to buy yourself; by exercising the option, the purchase is concluded immediately. With a right of first refusal, the landlord decides whether to sell, and must then first offer the property to you. The initiative therefore lies with the tenant in the case of a purchase option, and with the landlord in the case of a right of first refusal.

Is the landlord allowed to sell the property to someone else if I have a purchase option?

A purchase option does not oblige the landlord to offer the property to you first. As long as you do not exercise the option, the landlord can, in principle, also sell it to a third party. If you want to be protected against this, you need an additional right of first refusal.

Do I need a financing contingency with a purchase option?

This is highly recommended if you are dependent on a loan for the purchase. Without a financing clause, you are bound to the purchase, even if the financing falls through. A well-formulated clause protects you against that risk.

Do I retain my purchase option if the property is sold?

That depends on what you have agreed. It is not automatic whether a purchase option or right of first refusal transfers to a new owner. Therefore, explicitly stipulate in the lease agreement what happens in the event of the sale or transfer of the property.

How do I fix the purchase price in a purchase option?

The price does not have to be a fixed amount, but it must be sufficiently determinable. This can be done via an independent valuation or an objective calculation formula, for example linked to the rental value. This prevents discussion about what exactly “market-conform” entails.

Can I include both a purchase option and a right of first refusal in my lease agreement?

Yes, you can combine both. A purchase option gives you the right to buy yourself, while a right of first refusal protects you against sale to a third party if you do not (yet) exercise the option. Ensure that the relationship between the two clauses is clearly documented so that they do not contradict each other.

What can I do if the landlord ignores their obligation to offer the property for sale?

If the landlord sells the property without first offering it to you, he violates the right of first refusal and may, in principle, be liable for the damages you suffer as a result. Exactly what is possible depends on the wording of the clause and the circumstances. Therefore, have your position assessed quickly, as response times are often short in this regard.

Have your purchase option or right of first refusal legally watertight

A purchase option or right of first refusal is only valuable if it is carefully formulated from a legal perspective. An unclear sentence can make the difference between becoming the owner and a protracted conflict. MKB Juristen assists entrepreneurs with this on a daily basis, whether it involves drafting a lease agreement for commercial premises or providing advice on tenancy law and real estate law.

Do you want to add a purchase option or right of first refusal to your lease agreement, or are you unsure about an existing clause? Schedule an intake meeting with one of our experienced legal experts, and we will ensure it is properly documented.