<PAGE>   1
                                                                   Exhibit 10.3


                                BROOKE GROUP LTD.
                       100 S.E. SECOND STREET, 32ND FLOOR
                              MIAMI, FLORIDA 33131



                                                              July 20, 1998



Mr. Howard M. Lorber
70 East Sunrise Highway
Suite 411
Valley Stream, New York 11581

Dear Mr. Lorber:

         We are pleased to inform you that Brooke Group Ltd. (the "Company") has
granted you a nonqualified option (the "Option") to purchase 500,000 shares of
the Company's common stock, par value $.10 per share (the "Common Stock"), at a
purchase price of $9.75 per share, subject to adjustment (any of the underlying
shares of Common Stock to be issued upon exercise of the Option are referred to
hereinafter as the "Shares"), pursuant to the Company's 1998 Long-Term Incentive
Plan, as may be and is in effect and as amended from time to time (the "Plan").
This agreement is conditioned upon the approval of the Plan by the Company's
stockholders and is subject in all respects to the terms and provisions of the
Plan, all of which terms and provisions are made a part of and incorporated in
this agreement as if they were each expressly set forth herein. In the event of
any conflict between the terms of this agreement and the terms of the Plan, the
terms of the Plan shall control.

         1. The Option may be exercised on or prior to the tenth anniversary of
the date of grant (after which date the Option will, to the extent not
previously exercised, expire), provided the Option shall only vest and become
exercisable as to one-fourth of the aggregate shares covered thereby on each of
the first four anniversaries of the date of this agreement. However, any then
unexercisable portion of the Option shall immediately vest and become
exercisable upon (i) the occurrence of a "Change in Control" as defined in
Section 6(f) of the Employment Agreement dated as of January 1, 1995, as amended
as of January 1, 1996, by and between you and New Valley Corporation, regardless
of whether the Employment Agreement is then in effect (the "Employment
Agreement"), other than any Change in Control arising by reason of a
testamentary bequest by Bennett S. LeBow to or for the benefit of his surviving
spouse of any or all securities of the Company or of New Valley Corporation
beneficially owned by him as of the date of death, so long as, following the
bequest, the event referenced in Section 6(f)(ii) of the 




<PAGE>   2
Mr. Howard M. Lorber
July 20, 1998
Page 2


Employment Agreement shall not have occurred, or (ii) the termination of your
consulting arrangement with the Company due to death or Disability (as defined
in Section 2.8 of the Plan).

         2. The Option, from and after the date it vests and becomes exercisable
pursuant to Section 1 hereof, may be exercised in whole or in part by delivering
to the Company a written notice of exercise in the form attached hereto as
Exhibit A, specifying the number of the Shares to be purchased and the purchase
price therefor, together with payment of the purchase price of the Shares to be
purchased. The purchase price is to be paid in cash or by delivering shares of
Common Stock already owned by you for at least six months and having a fair
market value on the date of exercise equal to the purchase price of the Option
being exercised, or a combination of such shares and cash.

         In addition, payment of the purchase price of the Shares to be
purchased may also be made by delivering a properly executed notice to the
Company, together with a copy of the irrevocable instructions to a broker to
deliver promptly to the Company the amount of sale or loan proceeds necessary to
pay the purchase price, and, if required, the amount of any federal, state or
local withholding taxes.

         No Shares shall be issued until full payment therefor has been made.
You shall have all of the rights of a stockholder of the Company holding the
Common Stock that is subject to the Option (including, if applicable, the right
to vote the Shares and the right to receive dividends thereon), when you have
given written notice of exercise, have paid in full for such Shares and, if
requested, have given the certificate described in Section 9 hereof.

         3. In the event your consulting arrangement with the Company is
terminated for any reason, the Option shall forthwith terminate, provided that
you may exercise any then unexercised portion of the Option then vested and
exercisable pursuant to Section 1 hereof at any time prior to the earlier of
nine months after the termination of your consulting arrangement (one year in
the event of death or Disability), or the expiration of the Option.

         4. The Option is not transferable except (i) by will or the applicable
laws of descent and distribution, (ii) as a gift to a foundation, charity or
other not-for-profit organization, or (iii) for transfers to your family members
or trusts or other entities whose beneficiaries are your family members,
provided that such transfer is being made for estate, tax and/or personal
planning purposes.

         5. In the event of your death or Disability, the Option may be
exercised by your personal representative or representatives, or by the person
or persons to whom your rights under the Option shall pass by will or by the
applicable laws of descent and distribution, within the one year period
following termination due to death or Disability.




<PAGE>   3
Mr. Howard M. Lorber
July 20, 1998
Page 3


         6. In the event of any change in capitalization affecting the Common
Stock of the Company, including, without limitation, a stock dividend or other
distribution, stock split, reverse stock split, recapitalization, consolidation,
subdivision, split-up, spin-off, split-off, combination or exchange of shares or
other form of reorganization or recapitalization, or any other change affecting
the Common Stock, the aggregate number of shares of Common Stock covered by the
Option and the exercise price per share of Common Stock subject to the Option
shall be proportionately adjusted by the Company.

         7. The grant of the Option does not confer on you any right to continue
as a consultant or employee of the Company or any of its subsidiaries or
affiliates or interfere in any way with the right of the Company or its
subsidiaries or affiliates to terminate the term of your consulting arrangement
or employment.

         8. The Company shall require as a condition to the exercise of any
portion of the Option that you pay to the Company, or make other arrangements
regarding the payment of, any federal state or local taxes required by law to be
withheld as a result of such exercise.

         9. Unless at the time of the exercise of any portion of the Option a
registration statement under the Securities Act of 1933, as amended (the "Act"),
is in effect as to the Shares, the Shares shall be acquired for investment and
not for sale or distribution, and if the Company so requests, upon any exercise
of the Option, in whole or in part, you agree to execute and deliver to the
Company a reasonable certificate to such effect.

         10. You understand and acknowledge that: (i) any Shares purchased by
you upon exercise of the Option may be required to be held indefinitely unless
such Shares are subsequently registered under the Act or an exemption from such
registration is available; (ii) any sales of such Shares made in reliance upon
Rule 144 promulgated under the Act may be made only in accordance with the terms
and conditions of that Rule (which, under certain circumstances, restrict the
number of shares which may be sold and the manner in which shares may be sold);
(iii) certificates for Shares to be issued to you hereunder shall bear a legend
to the effect that the Shares have not been registered under the Act and that
the Shares may not be sold, hypothecated or otherwise transferred in the absence
of an effective registration statement under the Act relating thereto or an
opinion of counsel satisfactory to the Company that such registration is not
required; and (iv) the Company shall place an appropriate "stop transfer" order
with its transfer agent with respect to such Shares.

         11. The Company represents and warrants to you as follows: (i) this
agreement and the grant of the Option hereunder have been authorized by all
necessary corporate action by the Company and this letter agreement is a valid
and binding agreement of the Company enforceable against the Company in
accordance with its terms; (ii) the grant of the Option to you on the terms 





<PAGE>   4
Mr. Howard M. Lorber
July 20, 1998
Page 4


set forth herein will be exempt from the provisions of Section 16(b) of the
Securities Exchange Act of 1934, as amended, pursuant to Rule 16b-3(d)
thereunder; (iii) the Company will obtain, at its expense, any regulatory
approvals necessary or advisable in connection with the grant of the Option or
the issuance of the Shares; and (iv) the Company currently has reserved and
available, and will continue to have reserved and available during the term of
the Option, sufficient authorized and issued shares of its Common Stock for
issuance upon exercise of the Option.

         12. Promptly following the date hereof, the Company shall use its best
efforts to file and keep in effect a Registration Statement on Form S-8, Form
S-3 or other applicable form to register under the Act the Shares issuable to
you upon exercise of the Option and the resale thereof by you.

         13. This letter agreement contains all the understandings between the
Company and you pertaining to the matters referred to herein, and supercedes all
undertakings and agreements, whether oral or in writing, previously entered into
by the Company and you with respect hereto. No provision of this letter
agreement may be amended or waived unless such amendment or waiver is agreed to
in writing signed by you and a duly authorized officer of the Company. No waiver
by the Company or you of any breach by the other party hereto of any condition
or provision of this letter agreement to be performed by such other party shall
be deemed a waiver of a similar or dissimilar condition or provision at the same
time, any prior time or any subsequent time. If any provision of this letter
agreement or the application of any such provision to any party or circumstances
shall be determined by any court of competent jurisdiction to be invalid and
unenforceable to any extent, the remainder of this letter agreement or the
application of such provision to such person or circumstances other than those
to which it is so determined to be invalid and unenforceable, shall not be
affected thereby, and each provision hereof shall be validated and shall be
enforced to the fullest extent permitted by law. This letter agreement will be
governed by and construed in accordance with the laws of the State of Delaware,
without regard to its conflicts of laws principles. This letter agreement may be
executed in counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.



<PAGE>   5
Mr. Howard M. Lorber
July 20, 1998
Page 5


         Would you kindly evidence your acceptance of the Option and your
agreement to comply with the provisions hereof by executing this letter
agreement in the space provided below.


                                                Very truly yours,

                                                BROOKE GROUP LTD.


                                                By: /s/ Richard J. Lampen
                                                    ---------------------------
                                                    Richard J. Lampen
                                                    Executive Vice President

AGREED TO AND ACCEPTED:

/s/ Howard M. Lorber
-----------------------
Howard M. Lorber



<PAGE>   6



                                                                      EXHIBIT A



Brooke Group Ltd.
100 S. E. Second Street, 32nd Floor
Miami, Florida 33131

Gentlemen:

         Notice is hereby given of my election to purchase _________ shares of
Common Stock, $.10 par value (the "Shares"), of Brooke Group Ltd., at a price of
$9.75 per Share, pursuant to the provisions of the stock option granted to me on
July 20, 1998. Enclosed in payment for the Shares is:

                / /   my check in the amount of $_________________.

                / /   ______________ Shares having a total value of
                      $______________, such value being based on the
                      closing price(s) of the Shares on the date hereof.

         The following information is supplied for use in issuing and
registering the Shares purchased hereby:

                  Number of Certificates
                     and Denominations              ___________________________

                  Name                              ___________________________

                  Address                           ___________________________

                                                    ___________________________

                                                    ___________________________

                  Social Security No.               ___________________________

Dated:
                                                    Very truly yours,



                                                    Howard M. Lorber