Essential option terms

The issue of what an option contract must contain to be enforceable has been subject to litigation.


from Negotiating and Drafting Office Leases, Law Journal Press


"The court must assure itself that there was a definite meeting of the minds between the option parties, and that the essential terms were not left to future negotiations. [Drost v. Hill, 639 So.2d 105 (Fla.
Dist. App. 1994)]


An option clause is a provision that gives a party, usually the tenant, a right within the specified time of carrying out a transaction upon stipulated terms. The instances for which options are typically given
are:


a. Renewal;
b. First refusal;
c. Expansion or contraction;
d. Cancellation; and
e. Purchase rights.


All the material and central terms must be stated in the option contract before a court may grant an order for specific performance. There must be clear and convincing evidence that leaves no doubt as to the option terms. [Kruse v. Hemp, 853 P.2d 1373 (Wash. 1993)]. In Kruse v. Hemp, the court outlined the following material terms:


(1) Time and manner of transferring title;
(2) Procedure for declaring forfeiture;
(3) Allocation of risk regarding damages or destruction;
(4) Insurance provision;
(5) Responsibility for taxes, repairs, water and utilities;
(6) Restrictions, if any, on capital improvements, liens, removal or
replacement of personal property, and types of use;
(7) Time and place for monthly payments; and
(8) Indemnification provisions.


Landlords may want to use the following renewal option checklist provisions applicable to office lease renewals:


· No renewal options if tenant is in default. Tenant
compromise: minor nonmaterial defaults should not prevent renewal.


· No renewal by tenant with health, safety or building code
violations. Violations place owners at risk for fines. Compliance with law provisions should provide that tenant's failure to comply with any law, order, ordinance or regulation will be a default under the lease, preventing tenant from renewing its lease.


· Retain right to reject renewals for financially risky
tenants.


· Require representation by tenant that it will continue the
same use during the renewal.


· Structure the renewal option so that it can be exercised
only by original tenant, and not by assignee or subtenant.


· Make renewal contingent upon guarantor's reaffirmation
of the guaranty.


· Required time for renewal notice should provide landlord a
reasonable time period to find a new tenant if tenant does not renew, usually at least 6 months.


· Obtain tenant's written renewal notice by certified
mail.


· Do not promise to send pre-renewal notices to tenants.


· Keep flexibility to renew using a new lease form or lease
amendment.


· Provide for an increase in the security deposit if the rent
is going to increase.


· Exclude any concessions landlord does not want available
during the renewal term.


· Specify a definite method in the option to determine
renewal rent. Do not use vague language such as at a rate, acceptable to both parties or that the parties agree to agree on the renewal rent when the tenant exercises its renewal options."

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