Lease Option Agreements 

A Purchase Lease Option is a legal mechanism & agreement that allows someone to control a property and produce income from it, with the right to purchase the property at a later date, but not the obligation to do so.

1. Option Agreement - An option agreement is an agreement entered into by a landowner and a potential purchaser which grants the purchaser the right to purchase the property during a defined period (‘Option Period’).

2. Lease or Management Agreement - The second document will be a lease or management agreement which will govern the management of the property during the Option Period. The purchaser will pay owner a monthly fee to the owner and in return the owner will allow the purchaser to manage the property and rent it out to an under-tenant/sub-let enabling them to make a profit.

3. Power of Attorney- This third document authorises you to sign official documents (relating to this property transaction only) should the owners not be able or want to do so themselves, in particular proving authority to enforce the terms of any letting agreements.

4. The Buyer will seek a restriction against the title to provide them with a greater degree of protection against the owner (and a third part buyer) if the property is sold to someone else.

5. The parties will negotiate a number of terms to be contained in both agreements. However, the four most important terms will always be:

The Option Period- The length of the option period- This may be any period agreed by the parties.

The Option Fee- For the option to be binding there must be consideration. This may be any sum agreed by the parties. This can be as little as £1.00.

The Monthly Fee- Again, this may any sum agreed by the parties, but it is usually at least whatever the owner needs to cover their mortgage any other costs.

The Purchase Price- The parties will agree the purchase price that the purchaser has the option to buy the property for during the Option Period.

Purchase Lease Options offer several benefits to purchasers including:

1. The purchaser can invest very little at the start of the transaction rather than a larger deposit in a usual purchase transaction - The Option Fee may be a £1.00 rather than a 10% or 25% deposit.

2. The purchaser can pay cash or take out a mortgage to purchase the property, but they may also look to “flip” the opportunity, though this requires careful drafting and specialist clauses.

3. The purchaser makes an income every month from letting the property.

4. Always seek the right to extend as a term in the agreement in order to extend the lease period if need be at the end of the initial lease period.

5. If the Property value goes beyond the agreed purchase price, you may purchase and generate instant equity.

6. If circumstances change you are not obliged to the purchase the property.

There may be many reasons, but commonly:

1. The Seller has financial issues.

2. The property is acquired out of probate.

3. The Seller no longer wishes to manage a property or a portfolio of properties and/or is badly effected by tax legislation.

A Working Example

The property is worth £190,000 now, and you have the option to purchase it for £200,000.

The option period lasts for 5 years.

You pay the owner £1.00 (Option Fee).

You pay the owner £300.00 per month which covers their mortgage.

You rent out the property to a tenant for £600.00 per month (perhaps after a refurbishment) and you pay £300.00 to the owner. If you have property expenses of £100.00 you will make £200.00 profit each month.

At the end of the option period, there are three possible scenarios:

The property is still worth £190,000. You may not want to purchase the Property, so would not exercise the Option and return the property to the owner. You have still generated profit from the monthly payments. You could renegotiate a new Option term and agreement with the owner.

The property may be worth more. For example, £210,000. You may take out a mortgage and purchase the property in the normal way. You have bought the property at a discount and made an income during the option period.

The final option is introducing a third-party purchaser to the owner and you may take the uplift between the agreed purchase price under the Option and the purchase price paid by the third party, providing clauses are carefully prepared.

Some clients share profits with the owner which can encourage them to enter into the arrangement.