Resolving Lease Purchase Option Disputes
A lease with option to purchase is a lease between a landlord and tenant where the tenant has the right to exercise an option to buy. The benefit to the landlord is the receipt of rent from the tenant plus additional compensation for providing the option to buy. For residential transactions, the tenant has the benefit of consumer protection laws and the right to walk away from the lease without purchasing. The option usually locks in the price should the tenant decide to buy. The option gives security to the tenant knowing they can “try before buying” and a guaranteed purchase price regardless of any increase in fair market value.
Lease options also have risks and drawbacks. The tenant will have to pay something to the landlord in exchange for the right to buy (the option). This compensation is usually in the form of increased rent during the term or a lump sum payment at the start of the lease. If the tenant decides not to exercise the option, the payment is forfeited.
Lease option agreements are also ripe for serious unanticipated disputes. Below are three common disputes that result in litigation:
1. What happens to the tenant if the seller cannot transfer title? If the seller defaulted on a mortgage or incurred a judgment, the tenant’s claim will be subordinate to the mortgage or judgment holder. An unscrupulous seller may even intentionally accept the tenant’s option payment knowing that title will never be delivered.
2. Matters are often made worse when the tenant unwisely invests improvements to the property anticipating a sale. Those improvements may end up become a gift to the seller or a foreclosing lender.
3. Lease options may contain an “as-is” sale clause. A tenant who did not exercise due diligence before paying the option payment may be stuck with a seriously defective property.
As a real estate attorney to property owners, I help resolve disputes involving lease purchase option contracts. If you know a person involved in an lease option dispute, please forward our contact information:
Phone (484) 690-4613
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