Lease of Mind: Why Developers Should Consider Lease Options in Real Estate Agreements

This article was originally published in the Daily Journal of Commerce on May 22, 2025.

Before leasing land, it is important for developers to understand the benefits of using a lease-option structure instead of jumping straight into a leasehold. By deliberately separating and sequencing the grant of rights from a landowner to a developer, parties can better manage potential reporting obligations under the Agricultural Foreign Investment Disclosure Act (AFIDA) and environmental liability under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).

Understanding lease options vs. leaseholds

A “lease option” agreement can give you the right, but not the obligation, to lease real property in the future. A lease option is generally considered to be a contractual, personal property right. On the other hand, a “true lease” agreement creates a leasehold estate once the agreement is signed. Leaseholds generally give rise to contractual, real property rights. By using a lease option or structuring a lease to function like a lease option, you can better control when real property rights are created, and by extension, when certain legal obligations/implications take effect.

Why this matters: AFIDA

AFIDA is a federal law that requires foreign persons (including entities organized or formed under the laws of foreign governments and domestic entities that are substantially controlled by foreign persons) to file a report with the USDA within 90 days of acquiring or transferring “any interest” in agricultural land. Leasehold interests of more than 10 years trigger an AFIDA filing requirement, as “any interest” is defined broadly. However, certain types of interests are excluded from the filing requirement, including “contingent future interests.”

If your lease has a term of longer than 10 years, you might need to make an AFIDA filing with the USDA. However, the USDA appears to interpret the “contingent future interest” exception to mean that lease options are not reportable interests because options do not effectively convey an ownership interest in agricultural land. The USDA’s Handbook on Foreign Investment Disclosure explicitly states that “options are considered future interests” and are not reportable. Some developers rely on this safe harbor to delay AFIDA filings after lease execution, arguing that the development period under a lease is functionally equivalent to an option period, with the AFIDA filing requirement triggered by the shift from the development period into the operations period of the lease.

While the clearest way for a developer to avoid triggering an AFIDA filing requirement would be to use a true option agreement with a lease attached as an exhibit, many developers favor a more streamlined document put in front of landowners. Thus, some agreements maintain the look and feel of a lease while making the distinction that the developer’s real property rights under the agreement are “contingent future interests” vesting upon a defined commencement date, not the agreement effective date. The developer can then treat that commencement date as the trigger for the 90-day AFIDA filing window.

Why this matters: CERCLA

CERCLA, on the other hand, is a federal law that deals with environmental liability. CERCLA creates a defense to liability a tenant can preserve by conducting all appropriate inquiries (AAI) before it acquires a leasehold interest in the facility. One of the key steps in a tenant’s AAI is obtaining a proper Phase I environmental site assessment within 180 days before the creation of the tenant’s leasehold estate.

While there is not much case law on point, courts deciding questions of tenant liability under CERCLA seem mostly concerned with the level of control the tenant had over the subject property. We are not aware of any case law interpreting whether a tenant under a lease could preserve a defense to CERCLA liability by arguing that it conducted AAI before it exercised exclusive control over, or earth-moving activities on, the subject property. Still, a tenant would be in a better position to argue for that defense if the lease itself only creates a leasehold estate in favor of the tenant upon a defined commencement date (e.g., the start of construction), not the agreement effective date.

How to structure your agreement

Ultimately, a developer’s ability to designate when its real property rights vest allows for greater control over timing for (1) the trigger date for the AFIDA filing requirement and (2) the receipt of a Phase I ESA to preserve a defense to liability under CERCLA.

There are two approaches to address these concerns: (A) using a true option agreement with an agreed-upon form of lease attached as an exhibit; and (B) using a nuanced lease agreement that makes the distinction between the grantee’s rights during a development period (e.g., a license for site access and inspection only; no possessory interest) and the grantee’s real property rights (e.g., leasehold and easement rights; possession and right of use) vesting upon a defined commencement date, not the agreement effective date.

By using either of these strategies, you can better manage reporting obligations under AFIDA and/or environmental liability under CERCLA, providing important flexibility as you plan and develop your projects.