Lease Option Contract

There are several different types of contracts that can come into existence. A lease is one such contract that is commonly used by people to rent out real estate and even assets. When it comes to leasing a real estate, there are several types of contracts that you can avail in the process.

What is a Lease?

A lease contract is an umbrella term that identifies a long-standing contract over a real (material) asset. A lease is not restricted to the 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, thus, said to be the primary contract of rental transactions. During the course of business, there many tailored lease contracts that have been modulated by people, for the sake of convenience. A lease option agreement is a popular variant of such contracts.

Lease Option Explained

A lease option contract is any agreement that provides the lessee an option to buy the asset that is being leased out at a later stage. The lease option is basically a kind of right to purchase that is sold by the lessor to the lessee. This definition may sound very confusing, but here's the explanation.

When a lessor rents out an asset to a lessee, a contract of lease is signed between the two parties. 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 the lease option and an ordinary lease. The contract contains a clause, which enables the lessee to purchase an option. An option is basically a right that empowers the lessee, to purchase the asset at the end of the lease period. Alternatively, the lessee may also not purchase the asset and might simply return it to the lessor. The option, costs the lessee some money, which is often termed as option price. If the lessee pays the price and takes the option, then he is empowered with the right to purchase or not purchase at a later date.

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 did have a house of their own but were also handed the right to purchase it upon the improvement of economic conditions. Thus, a residential lease option, is often considered to be an alternative to conventional mortgage loans.

As mentioned above, 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 lease out resort to leave option contracts. Some prominent examples, which can be stated, include:

• Ships that are used to transport enormous amounts of cargo
• Very costly heavy machinery
• Nations, even lease out defense elements such as tanks, aircraft carriers and submarines
• Gas and petroleum pipelines
• Charter Jets
• Land and entire plant and machinery

It must be noted that the right 'option' is also used in different commercial agreements, such as shares of a company, cars, mutual funds, etc. Copyrights and patents can also become subjects of lease option agreement.