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LARG 530
STRATEGIES FOR THE FAIR
MARKET VALUE OPTION TO
PURCHASE
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The landlord might be inclined to agree to the option if the lease is otherwise sweet
enough, or forced to if the tenant will not do the deal without an option. Many fixed
price options are calculated based upon the landlord's development cost for the building
plus a healthy profit over the landlord's development and holding period. However,
calculating fixed option prices has always been, and will always be, a risky practice for
the landlord. It is a gamble on the market that only the tenant can win.
The tenant would exercise the option if the property's value increased during the term of
the lease. This would give the tenant a gain equal to the value of the property as of the
exercise date less the fixed price it was obligated to pay under the option clause. If the
property value declined during the term of the lease, then the tenant would almost
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certainly let the option lapse. If the property's value stayed the same as when the lease
was executed, and roughly equaled the fixed purchase price under the option, the tenant
would probably not exercise without a monetary gain, unless it liked the location of the
building or other factors associated with the property motivated its exercise.
When the property value increased over the term of the lease (i.e., over and above the
fixed purchase price contained in the option), an exercise of the option would do little for
the landlord's good humor. In the landlord's view, the tenant was enriching itself with the
landlord's real estate. Many landlords who found themselves in this situation resisted the
tenant's exercise of the option in court. They would claim the option was unenforceable
for a variety of reasons, that the option violated the rule against perpetuities, or anything
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an increase in property value and a fixed price option has generated much litigation and
case law concerning options to purchase.
It also makes it easier for the landlord to agree to the option as part of the lease package.
Assuming the landlord and tenant can agree upon the purchase price after exercise, or if
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they cannot, that the appraisal process works fairly, both the landlord and the tenant
should be happy with the outcome following the tenant's purchase of the property.
Section 28.1. Landlord hereby grants to Tenant the option (the "Purchase Option")
to purchase the Premises by written notice from Tenant to Landlord (the "Purchase
Option Notice") given not more than three hundred sixty (360) days, nor less than
one hundred eighty (180) days, prior to the Expiration Date of the Initial Term or
each applicable Renewal Term, as the case may be. The purchase price for the
Premises shall be equal to the "Fair Market Value" of the Premises, which shall be
determined as hereinafter set forth.
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their determinations of value, and the difference between the values is less than ten
percent of the lesser valuation. If that proves to be the case, then the two values are
added together and fifty percent (50%) of that sum is deemed to be the fair market value
for the property.
(d) If the difference between the amounts so determined exceeds ten percent (10%)
of the lesser of such amounts, then (i) such two Appraisers shall have twenty (20)
days to appoint a third Appraiser; (ii) if such Appraisers fail to do so, then either
Landlord or Tenant may request the American Arbitration Association or any
successor organization thereto to appoint an Appraiser within twenty (20) days of
such request and both parties shall be bound by any appointment so made within
such twenty (20) day period; and (iii) if no such third Appraiser shall have been
appointed within such 20 (twenty) days or within ninety (90) days of the Price
Determination Date, whichever is earlier, either Landlord or Tenant may apply to
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any court having jurisdiction to make such appointment.
Comment: Section 28.3 (d) covers the situation where the difference between the two
valuations is greater than ten percent of the lesser valuation. In that case, the two initial
appraisers have twenty days to appoint a third appraiser. If they fail to do so, then either
landlord or tenant can request the American Arbitration Association to appoint a third
appraiser. Finally, if a third appraiser is not appointed by the two initial appraisers, or
by the American Arbitration Association, then either landlord or tenant can request any
court with jurisdiction to make the appointment.
Comment: Section 28.5 (b) sets the time for the closing at 10:00 a.m., although if the
landlord and the tenant are actually expecting recordation of the deed and other closing
documents at that time, the availability of a 10:00 a.m. recording will obviously depend
upon local custom and practice of the county recorder in which the property is located.
(c) The Premises shall be conveyed subject only to the Permitted Exceptions and
such other matters created by Tenant or arising out of Tenant's use and occupancy
of the Premises, but free and clear of the lien of any mortgage, deed of trust,
security interest and encumbrance created by or resulting from acts of the
Landlord, any successor of Landlord, any party claiming through Landlord, or any
other person, without the express written consent of Tenant. For purposes hereof,
the execution of any attornment agreement with any Fee Mortgagee shall not be
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deemed consent to such mortgage or security interest.
Comment: Section 28.5 (c) covers the condition of title to be conveyed at closing.
That section indicates that the premises will be conveyed subject only to permitted
exceptions and other matters created by the tenant or arising out of the tenant's use and
occupancy of the premises. Title is to be clear of any financing liens and free of any
security interest or encumbrance created by the landlord or any successor or party
claiming through the landlord, absent the tenant's express written consent. Section 28.5
(c) also provides that the tenant may execute an attornment agreement with the
landlord's lender without running the risk that the landlord will claim that the tenant
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thereby consented to such financing as a permitted exception in the event the option is
exercised.
(d) Any transfer tax, documentary deed stamps, and any other tax or governmental
charges customarily paid by a seller of real property in the state in which the
Premises are located, any recording charges incurred in connection with the
recording of the deed to the Premises, and any title insurance premiums necessary
to insure good fee title in Tenant, shall be paid in full by Landlord in cash or
certified check at the closing to the appropriate governmental authorities or
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agencies. Tenant shall pay all other closing costs and charges incident to the
conveyance of the Premises. Each party shall pay its own legal fees and
administrative costs incurred in connection with any such conveyance of the
Premises to Tenant.
Comment: Section 28.5 (d) allocates closing costs between the landlord and the
tenant. It provides that any transfer taxes or other governmental charges normally paid
by a seller of real property, plus any recording charges and title insurance premiums will
be paid by the landlord at the closing. The section obligates the tenant to pay all other
closing costs. Both the landlord and the tenant agree to pay their own legal and
administrative fees incurred in connection with the closing.
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