Definition of a lease buy out

Written by jim hagerty
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A lease buy-out can be an easy process, depending on what each party wishes to accomplish during the transaction. Some buy-out options are written into original leases, while others are agreed upon later by tenants and landlords. Understanding the process of lease buy-outs is fairly simple.

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Defintion

Generally, the term "lease buy-out" refers to a situation in which a tenant pays a landlord a sum of money to end his lease before it expires. A document is usually signed by both parties stating that both agree that the lease will become null and void at that point. These types of buy-outs usually happen when a tenant has trouble making monthly payments and offers some sort of payment that satisfies the landlord. It is also common for tenants to have legitimate reasons for breaking leases, such as professional relocation.

Legal Obligations

Unless there is a provision in a lease that specifies a tenant may buy out his lease before it expires, landlords are not bound to agree to such an option. But buy-outs are commonly drawn up after a period of negotiation. Landlords typically are able to legally recover the entire balance of a lease if it is broken before its expiration and there is no agreement.

Negotiating a Buyout

Negotiating a buy-out is much like any other transaction that involves trying to reach a win-win agreement between two parties. Generally, a tenant will offer her landlord an amount she feels is fair to get out of the lease. The landlord may come back with a counteroffer, and the two usually meet halfway to avoid turning the case over the courts, which is usually a more costly proposition for everyone involved. Lease buy-outs average 50 to 60 per cent of the remaining balance on the lease, depending on market conditions and the landlord-tenant relationship.

Commercial Lease Buyouts

Commercial landlords frequently allow their tenants to buy out their leases for less than is owed, especially during tough economic times. This is usually done when a tenant needs to move to another location to save money or is forced to close his business. The landlord, in turn, looks for a tenant she feels will remain in the property for the remainder of the lease or longer, accepts the buy-out from the existing client and allows the new tenant to move in (see Resources section).

Lease Options

Real estate leases often contain an option for a portion of rent paid by a tenant to be put in escrow and go toward a down payment to purchase the property after a specific period of time. When the down payment goal has been reached, the tenant and landlord agree on a sales price, less the money set aside in escrow. At that time, a sales agreement is drafted, the tenant gets a home loan or pays the seller in cash, and ownership of the property is transferred.
These agreements are sometimes incorrectly referred to as buy-outs.

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