Lease-options are back in vogue. And that is just fine as long as the optionor (owner) and the optionee (tenant) take care to be clear about exactly what they intend with the option. "I'll rent your house now, and I get a chance to buy it later on," isn't quite enough.

This subject has been addressed here before, but it is important enough to warrant further attention. Anyone who doesn't think so should pay attention to a recent case from California's Fourth Appellate District (Sunil Patel v. Morris Liebermensch et al.).

In July of 2003, Sunil Patel and his wife rented a condominium from Morris Liebermensch. The parties also agreed that Patel would have an option to buy the unit. Liebermensch drew up a document that said, "Through the end of the year 2003, the selling price is $290,000. The selling price increases by 3 percent through the end of the year 2004 and cancels with expiration of your occupancy. Should the option to buy be exercised, $1,200.00 [the amount of the security deposit] shall be refunded to you."

In July of 2004, Patel notified Liebermensch of his desire to exercise the option at a price of $298,700 according to the terms to which they had agreed. Liebermensch responded by drafting a purchase agreement requiring that a 10 percent deposit would be placed in a specified escrow company, that the sale would be "as is," and that the escrow period would be 90 to 120 days. The lengthy escrow was needed so that Liebermensch would have time to accomplish a tax-deferred exchange.

Patel countered to some of the terms proposed. After the "as is" provision, he added language that would enable him to cancel "if not fully satisfied." He further indicated that if the escrow were to be more than 30 days, the deposit would only be $5,000. Also, if the escrow had to be more than 30 days, Liebermensch was to bear all escrow expenses.

Liebermensch did not accept Patel's changes. Negotiations ensued, but eventually broke down. They could not come to an agreement on the terms. In November of 2004, Patel filed a lawsuit seeking specific performance.

A jury found (a) that the two had entered into an option agreement giving Patel the right to purchase the property, and (b) that the terms of the option contract were "sufficiently clear to enable the parties to carry out the objective of the contract." The trial court then ordered that the contract be performed with escrow closing no later than 60 days. Liebermensch appealed.

The appellate court noted that, "To be enforceable, an option contract must contain all the material terms that would be contained in the ultimate contract of sale … . These essential contract terms include (1) the parties, (2) the term of the option, (3) the identity of the property and (4) the price and method of payment." "In addition, any other terms that are intended to be included within the bilateral purchase contract … must be included within the terms of the option." [my emphasis] The idea is, when the option is exercised, there should be nothing further to negotiate about.

Now, the court also acknowledged that sometimes terms, such as the time of payment, might be left out, but the contract could still be enforced "because the law implies a reasonable time." However, it went on to emphasize that, if there is uncertainty about some term of a contract, and "the uncertainty relates to a matter that is so important to the contract that the court cannot determine what the parties intended," then courts will refuse to enforce the uncertain agreement.

In the Patel case, there was never any agreement about the time of payment (length of escrow), and, for the parties, that was a crucial issue. They never had reached a complete agreement; hence the option contract could not be enforced. The appellate court reversed the judgment of the trial court.

There's a moral to this story, one that we have heard before. If you are going to create an option to buy, it is a good idea to draft a completed purchase agreement (though undated and unsigned) as an exhibit that will clearly specify what the terms of the potential sale will be.