§17.10 - Purchase Options

• Jurisdiction: Washington

§17.10 PURCHASE OPTIONS

Leases sometimes grant to the tenant an option to purchase the demised premises. Two forms of option are typically used, the straightforward option to purchase and the so-called "right" (power) of first refusal.

(1) Nature and creation of purchase options

An option to purchase operates like purchase options that are commonly given separate from leases. The tenant may exercise the option during the life of the leasehold or during some other stated period by giving notice of its election to do so. Little Washington authority exists on how precisely the terms must be set forth. The purchase price may be fixed by arbitration or appraisal. See Omicron Co. v. Hansen, 16 Wn.2d 362, 133 P.2d 505 (1943). Although the option clause ought to state specifically the time period within which the tenant may exercise the option, if no period is stated, the tenant may exercise it any time during the term of the lease. Willenbrock v. Latulippe, 125 Wash. 168, 215 P. 330 (1923). The court in Roth v. Snider, 25 Wn.2d 514, 515, 171 P.2d 819 (1946), held that the following language created a straight option: "The farm is subject to sale. The tenant has first option to purchase farm for [stated price and terms]."

For a right of first refusal, the tenant typically is given an election to purchase the premises if the landlord is disposed to accept a purchase offer from a third person, generally on the same terms as the third person offers. See Superior Portland Cement v. P. Coast Cement Co., 33 Wn.2d 169, 205 P.2d 597 (1949).

Options of either kind must be supported by consideration. When the option is included in a lease, the tenant's various covenants will provide sufficient consideration. Richardson v. Harkness, 59 Wash. 474, 110 P. 9 (1910). Because options and contracts for the sale of land must be written and signed, a purchase option contained in a lease must be in the same form, but it need not be acknowledged. Phillipp v. Curtis, 35 Wn.2d 844, 215 P.2d 431 (1950). It would seem a good idea to have them acknowledged so they may be recorded and give notice of the option to third persons who might acquire an interest in the land. See Strong v. Clark, 56 Wn.2d 230, 352 P.2d 183 (1960). For application of the real estate excise tax to leases containing an option to purchase, see RCW 82.45.010 and WAC 458-61A-106.

An option to purchase entered into at the same time as a lease, but set forth in a separate contract, may be exercised by a tenant even if the tenant is in default under the lease, when the option agreement does not by its terms require the tenant to be in compliance with the lease as a prerequisite to exercise of the option. Ledaura,...