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What is a Lease Option Contract?

What is a Lease Option Contract?

Planning to rent a home, are you? Then, consider a lease option contract as it will provide you with an option of buying the very home you have rented and are staying in.
Scholasticus K
Last Updated: Mar 11, 2019
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A lease contract is an umbrella term that identifies a long-standing contract over a real (tangible) asset. Typically, a contract of lease is signed between two parties, the lessor and the lessee. It is not restricted to just real estate.
Common contract law provides it to be a rental agreement where an asset is rented out to a lessee for a period of time, in consideration for a sum of money paid in bulk or installments to the lessor/owner of the asset.
A lease agreement is said to be the primary contract of rental transactions. When it comes to leasing real estate, there are several types of contracts that you can avail of as per your need. A lease option agreement is one such popular variant.
Lease Option Explained
A lease option contract is an agreement that provides the lessee an option to buy the asset, that is being leased out, at a later stage. It basically provides a right to purchase option to the lessee after a specified rental period.
Now, as per a normal lease contract, a lessor rents out an asset to the lessee and is paid consideration on a periodic basis. At the end of the period of the lease, the asset is handed back to the lessor. If you look at a sample contract, you will realize the difference between a lease option and an ordinary lease.
The contract contains a schedule, which enables the lessee to purchase an option to buy the asset at the end of the lease period. Alternatively, the lessee may not purchase the asset and might simply return it to the lessor. The option costs the lessee some money, which is often termed as the option price.
If the lessee does not exercise the option to purchase the property by the end of the lease, then generally any upfront option money, along with any monies that the lessee paid in addition to the market rental rate for this option may be retained by the owner, depending on the agreement.
In the wake of the recent recession, a considerable number of people, who were denied mortgage loans, entered into a residential lease option.
The advantage was that they not only had a house of their own but were also handed the right to purchase it when they had the resources. Thus, a residential lease option is often considered to be an alternative to conventional mortgage loans.
Such a contract is not only used in real estate, but is also widely used by the corporate world. Companies that require very costly assets for their operations often resort to commercial lease option contracts. Some prominent examples, which can be stated, include:
  • Ships that are used to transport enormous amounts of cargo
  • Very costly heavy machinery
  • Governments can lease out defense elements such as tanks, aircraft carriers and submarines
  • Gas and petroleum pipelines
  • Charter Jets
  • Land, Plant and machinery
  • Copyrights and Patents
  • Vehicles for commercial use
These contracts are also used in commercial agreements such as shares of a company, mutual funds, etc.
It's always a good idea, when purchasing real estate, to hire experts to assist you in understanding the contract and ultimately complete a successful transaction.