Knowing Your Options – The Michigan Court of Appeals Enforces Option to Purchase Without Fixed Price Clause

Leases often include language that gives a tenant the option to purchase the leased property during or at the end of the lease term. The Michigan Supreme Court has held that these options to purchase, or “options” as they are commonly referred, are “simply a contract by which the owner of the property agrees with another that he shall have a right to buy the property at a fixed price within a specified time.”[1] Conceptually, options seem fairly simple and straight-forward. However, given the nature of an option—where one party has the unilateral right to compel the sale of property—options are the subject of much litigation. Michigan courts narrowly construe options, meaning that strict compliance with the language of the option is critical, and often the source of disputes. For example, options often include specific notice requirements, timelines as to when the option can be exercised, and a requirement that, at the time of the exercise of the option, the tenant is not in default of any lease terms. A recent opinion from the Michigan Court of Appeals (“COA”) could generate additional option disputes as it deviates from a long line of Michigan cases holding that options must contain a “fixed” purchase price.

In Crown Motors LTD v Rodenhouse Property Management LLC, unpublished per curiam opinion of the Court of Appeals, issued December 17, 2020 (Docket No. 352116), the COA examined a commercial lease with an option that did not include a fixed price clause. Instead, the lease provided that the tenant could exercise its option to purchase by providing notice to the landlord, and that “the parties shall negotiate the purchase price and other terms of the proposed sale and to enter into a real estate purchase agreement….” The option language gave each party the right to get their own appraisal of the property. Further, if the two appraisals resulted in differing valuations and the parties could not agree on price, the parties could jointly obtain a third appraisal, and the final purchase price would be the average of all three appraisals.

When the tenant in Crown Motors notified its landlord of its intent to exercise the option to purchase, the landlord claimed that the option was invalid and unsupported by consideration, but agreed nonetheless to negotiate for a sale of the leased property. After each party obtained an appraisal for the property, the landlord argued that both appraisals were too low and then refused to allow a third appraisal to be obtained for the purpose of determining the purchase price, as provided for in the lease. In response, the tenant successfully sued to enforce the option, with the trial court ordering the parties to obtain a third appraisal and ruling that the purchase price would be the average of the three appraisals.

On appeal, the landlord argued, among other things, that the lease’s option provision was unenforceable because it did not include a fixed price. The COA disagreed and held that while a purchase option must include all of the essential terms to form a contract, options are not required to include a predetermined purchase price. Instead, it is sufficient that a lease—like the lease at issue here—includes a fixed method for determining the purchase price. The COA reasoned that the option language was sufficient because it provided a clear and unambiguous method for calculating the purchase price in the event that the parties could not agree.

While the COA in Crown Motors addressed the specific issue of enforcing an option that did not include a fixed purchase price, this case also serves as a broader reminder that landlords and tenants need to fully understand how an option to purchase contained in a lease will operate if and when it is exercised. Attention to the negotiation and drafting of option provisions is the best way to avoid disputes down the road.

If you have questions about the matters raised in this alert, please contact Michael Vogt at 248-203-0739 (mvogt@dykema.com) or your regular Dykema contact.

---

[1] Le Baron Homes, Inc. v. Pontiac Housing Fund, Inc., 319 Mich. 310, 313; 29 N.W.2d 704 (1947) (Bailey v. Grover, 237 Mich. 548, 554-55; 213 N.W. 137, 139 (1927)) (emphasis added)