What is a Land Lease Option?

A land lease option refers to clause in a real estate contract which permits the lessee or renter the right, but not the obligation, to use a property longer than the period specified in the contract. Conventionally, the lessee or renter is supposed to pay a premium for the option, like a token amount in each year of the original contract. A lease extension is used to refer to this as well. A land lease option isn't synonymous to a lease to own contract, which permits the lessee to buy the property, instead of just extending the lease. A land lease option isn't similar to a lease purchase contract, which binds the two parties to selling the property at the contract period's end. With a land lease option, it's only the lessee that has an option of acting or not.

How is a Land Lease Option Used?

As with every option contract, the land lease option permits its holder to act on beneficial future market conditions. The lessee might want an option for various reasons. Supposing the land's future market value is uncertain, an option would permit the lessee to extend a cheap lease in a rising price environment. For corporations, lease options permit them to reexamine operations based on leased land in the future, before binding themselves into extremely long-term contracts.

Land Lease Option Example

Supposing the owner of the property leases their property to the lessee, they may come to an agreement of $5,000 monthly for a 10 year term. However, if the lessee thinks that real estate prices would increase during that period and also believe they would need the property beyond the contract term, then they may request a land lease option written into the contract. In a situation such as this, they are aware that the property won't only be available but would cost the same price for an added period of time. The extra fee or premium for this option may be $200 monthly for the period of 10 years summing the total cost to $5,200 monthly. Supposing the lessee exercises the option at the initial 10-year period, the lease payment would remain $5,000 per month. The lessee avoids the risk of contract renegotiation in 10 years or having to get a similar property for leasing. The owner of the property gives up the ability of charging more money later but gets additional $200 monthly for 10 years, or $24,000 which, in theory, is above the going market rate.

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