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Option Pricing Model Assignment Of Lease

I.            INTRODUCTION.

Assignments and subleases are commonplace.  The difference between the two is a product of common law.  Without a thorough understanding of the differing rights among landlords, tenants and transferees resulting from assignments and subleases, parties may find themselves unpleasantly surprised.  This article will outline the fundamental differences between assignments and subleases, how the common law arranges the on-going rights among the parties, and the advisability of certain express agreements that change the common law results.

II.            DISTINGUISHING BETWEEN AN ASSIGNMENT AND A SUBLEASE.

The quantity of interest transferred distinguishes an assignment from a sublease.  This distinction can be summarized as follows:

Assignment.   When a tenant transfers its entire interest in a leasehold estate, the transfer is an assignment.  To qualify as such, the transfer must include the tenant's entire estate for the duration of the lease.

Sublease.   When a tenant transfers less than the remaining term or less than the tenant's entire estate, thus leaving the original tenant with a reversionary interest in the lease, the transfer is a sublease.

For these purposes "estate" is tantamount to term.  Determination of whether a tenant has retained a portion of the estate does not depend on the whether the tenant receives less rent than it owes under the lease, or even on whether the tenant transferred the entire premises.  An assignment can occur regardless.  But, retention by the tenant of even the smallest right with respect to the term constitutes a "reversionary interest" and creates a sublease.  For instance, courts have construed a transfer as a sublease where the original tenant retained an option to terminate, extend or renew the prime lease.  In fact, the reversionary interest need not even be under the control of the original tenant to qualify the transaction as a sublease.  At least one court has held that a tenant may have retained a reversionary interest where a third party to whom premises are conveyed has the option to terminate the conveyance.[1]

Surprisingly, one factor that does not distinguish an assignment from a sublease is the portion of premises involved.  As long as the tenant relinquishes its interest in the portion of the premises transferred for the entire term of the lease, an "assignment pro tanto" occurs.  Such a transfer carries all the legal implications of any other assignment, except that the assignee has liability for only a portion of the rent proportionate to the interest it receives in the premises.  Most people would think that a sublease has occurred, because less than the entire premises has been conveyed.  However, such a transfer creates a form of assignment.  This means that the assignee will have privity of estate with the landlord, and may have privity of contract as well.

Landlords and tenants may not find pro tanto assignments desirable.  A landlord will be concerned about dealing with two separate tenant interests under one lease document.  For instance, what if the original tenant defaults under the lease with respect to its space, but the assignee continues to meet its obligations under the lease for its portion of the premises?  Would the landlord be forced to terminate the lease for only a portion of the premises?  The landlord certainly did not intend this result when it entered into the lease.  Although the landlord might be able to control this risk if the lease requires its consent for a transfer, what if the lease is silent?  From the assignee's or tenant's perspective, what if it wants to terminate the lease? Can it do so without the consent of the other party?  What if either the tenant or assignee bankrupts?  If the trustee rejects the lease, does this terminate the assignment?  No easy answers exist for these issues.  Comprehensive transfer provisions in leases and assignment documents provide the only real solution.

III.            WHAT'S AT STAKE: THE LEGAL IMPLICATIONS OF IDENTIFYING A TRANSFER.  

A.             Privity of Estate v. Privity of Contract.   The classification of a leasehold transfer as an assignment or sublease carries differing legal implications regarding future liability arising under the prime lease.  A party's liability under the terms of the prime lease ultimately depends upon the somewhat archaic term of "privity."  The common law recognizes two general types of privity: (a) privity of estate and (b) privity of contract.

Privity of Estate.   Privity of estate rests upon a landlord-tenant relationship.  Acquisition of a leasehold interest by the new tenant, regardless of whether it is an assignment or sublease, establishes privity of estate.

Privity of Contract.   Privity of contract rests upon the existence of an agreement, regardless of whether a landlord-tenant relationship exists.  Privity of contract does not run with the land, unlike privity of estate.  Accordingly, the original lease will not bind a new tenant under privity of contract unless the new tenant assumes the lease.

The original landlord and tenant under a lease have both privity of estate and privity of contract.  When the original tenant transfers its interest in the lease to a third party, these relationships inevitably change.  The manner and extent of the transfer determine what forms of privity will thereafter exist.

B.             Assignment.  If the original tenant assigns its interest in the lease, its privity of estate terminates, but its privity of contract remains intact.  In other words, assignment of the lease ends its right to possession, but, absent an express release under the terms of the lease, its liability under the lease continues.  When the assignee takes possession of the premises, the assignee obtains privity of estate.  Privity of estate binds the landlord and assignee to the terms of any covenants running with the land, but only so long as the privity of estate continues.  As a result, the assignee becomes liable to the landlord for the payment of rent and the breach of any other lease covenants running with the land.  Likewise, the landlord becomes liable to the assignee for the covenant of quiet enjoyment.  However, the assignee does not come into privity of contract with the landlord unless the assignee expressly assumes the tenant’s obligations under the lease.  Without an assumption, the assignee would not be liable for contractual agreements that do not run with the land, such as an original tenant/assignor's undertaking to pay a note made in favor of the Landlord.[2]   Further, absent the assignee's assumption of the lease, a subsequent assignment will end the assignee's privity of estate, and with it, all of that party's obligations to the landlord.  Thus, the absence of privity of contract between the landlord and assignee prevents the assignee from being liable for any breach committed by the original tenant or any prior or subsequent assignee.

As previously alluded, the tenant cannot relieve itself from liability under the lease merely by assigning the lease to a third party.  Despite an assignment, the tenant remains secondarily liable for the obligations of the assignee under the lease.  This means that if the landlord cannot recover from the assignee, it can thereafter pursue the tenant.  From the landlord's perspective, it would prefer to pursue either or both of the tenant and assignee, at its election and without exhausting remedies against one or the other. To achieve this end, the lease must expressly provide that the original tenant remains primarily liable notwithstanding a transfer of its interest.

If the assignee assumes the obligations of the tenant under the lease through agreement with the assignor, both the tenant and the assignee have privity of contract, while only the assignee has privity of estate.  The landlord can enforce the lease against the assignee as a third party beneficiary, regardless of whether the landlord was a party to the assignment/assumption agreement.  However, some jurisdictions have held that in limited circumstances, when a landlord has accepted the assignee in place of the assigning tenant, either expressly or by implication, then the assigning tenant is released from liability arising under the terms of the lease.[3]

Notwithstanding its initial liability under the lease following an assignment, the original tenant may later be released from liability, if the terms of the lease are amended by agreement between the landlord and the assignee.  Thus, from the landlord's perspective, it is important for the lease to provide that the tenant remains liable, at least for the initial lease obligations, regardless of any later amendment of the lease terms.

C.             Sublease.       A sublease, unlike an assignment, does not establish privity of estate or privity of contract between the landlord and the subtenant.  Instead, when a sublease occurs, the original tenant retains both privity of estate and privity of contract with the landlord.  No legal relationship exists between landlord and subtenant.  A sublease therefore does not transfer any of the original tenant's rights or obligations under the lease to the subtenant.  Accordingly, the landlord cannot hold the subtenant liable for a breach of the lease, even if caused by the subtenant, nor can the subtenant enforce the terms of the lease against the landlord.

Despite the lack of privity between the landlord and subtenant, a sublease does establish a new leasehold estate between the tenant and subtenant, creating both privity of estate and privity of contract.  Thus, the sublease document will control whether and to what extent the subtenant can hold the tenant liable for breaches of the lease by the landlord, and what happens if the subtenant's failure to perform under the sublease creates liability for the tenant under the lease.  These agreements do not, however, disturb the privity of contract and estate existing between the landlord and tenant, despite the subtenant's possession of the premises.  Thus, for either the landlord to have rights against the subtenant or vice versa, the landlord and subtenant must execute a separate document establishing them.

IV.             CONSENT, WAIVER AND BREACH:

The law favors free transferability of rights.  As such, a party may prohibit assignment or subletting only through the use of express prohibitions in the lease.  Absent such prohibitions, tenants may sublease or assign their leasehold interests freely.  However, simple restrictions on transfer in the lease may not be sufficient.  Many courts perceive restrictions against assignment or sublease as restraints on alienation.  As a result, courts often interpret restrictive language against the landlord.  For instance, a prohibition only against assignments does not preclude subleases, and vice versa.[4]   Furthermore, under the majority rule, a simple covenant against subletting would not bar subletting only a portion of the premises.[5]

Some states have enacted statutory limitations upon a tenant's right to transfer its leasehold interest.   For instance, a Texas statute prohibits tenants from subleasing or assigning a leasehold interest without the consent of the landlord.[6]   Other states have adopted similar restrictions, but only as to short term leases.[7]

Given the common law, and absent satisfactory statutory provisions that change the common law result, most leases contain language requiring landlord consent for transfers of the tenant's leasehold estate.  Where a requirement for landlord consent exists, in most jurisdictions the tenant's failure to obtain such consent will enable the landlord to recover damages.  However, in certain circumstances or where a statute or the language of a landlord consent requirement expressly provides, a landlord may be able to declare the assignment or sublease void, sue the tenant for breach of covenant or obtain an injunction.[8]   It is important to note, however, that the breach of covenant prohibiting assignment or sublease does not, in and of itself, terminate the lease.[9]   While an assignment in breach of the restriction may provide the basis for forfeiture, the assignee will still receive good title to the lease as a result of the assignment.  As such, the landlord is still entitled to recover rent from the assignee despite the breach.[10]

To ensure that the landlord can terminate the lease or void an unauthorized transfer regardless of jurisdiction, the lease should expressly provide such rights, at its election.  A landlord may, however, waive the breach of a transfer restriction against or otherwise prevent itself from objecting.  As such, although a lease may prohibit assignment or sublease without consent, the landlord may expressly, or by implication, be deemed to have waived a transfer in violation of the lease by acting in a manner that implies that the breach of this covenant has been waived.  For instance, the landlord's knowing acceptance of rent from an assignee or subtenant may constitute such a waiver, and prevent the landlord from declaring a lease forfeiture.

Another pitfall arises after a landlord has either consented to a transfer or waived a breach of a non-assignment clause.  Unless the lease expressly provides to the contrary, the restriction on transfer will terminate for future transfers.

V.            PRACTICAL ASPECTS

An assignment can differ from a sublease in only the most nominal way – at the very limit a transfer for an hour less than the full term constitutes a sublease, while a transfer for one hour longer constitutes an assignment.  In either case, the original tenant will remain liable to the landlord for the lease obligations.  But the rights of the landlord and transferee will differ.  In case of an assignment, the assignee will at least have privity of estate and therefore certain rights against the landlord and vice versa.  In case of a sublease, the subtenant has no rights against the landlord, nor does the landlord have any rights against the subtenant.

Each party will have different goals.  The landlord will want to enforce the lease against both the tenant and transferee to the maximum extent possible.  It would therefore prefer an assignment where the tenant agrees to remain primarily liable under the lease.  The transferee will want the freedom to enforce the essential lease obligations against the landlord with minimum liability.  It would therefore prefer and assignment without assumption.  The tenant would prefer either to have total absolution or total control.  Thus, it may prefer an assignment with assumption by the assignee and release of the tenant.  If the tenant cannot absolve itself of liability under the lease, it may opt for the other end of the spectrum, and create a sublease, retaining a nominal portion of the estate, in order to prevent the transferee from having direct dealings with the landlord.

Any of the foregoing results and infinite variations can arise.  The trick comes in making the results intentional.  A tightly crafted transfer clause in the lease provides the best solution.  The following list comprises the key elements to include:

1.          No transfer of all or any portion of the premises or the tenant's leasehold estate may occur without the landlord's consent.

2.          Any transfer without the landlord's consent is voidable, at the landlord's option.

3.          Any transfer without the landlord's consent may result in a forfeiture of the lease, at the landlord's option.

4.          The acceptance of rent by the landlord from any transferee will not be deemed to be a waiver of the landlord's right to consent or declare the lease forfeited or the transfer void.

5.          The landlord's consent to one transfer will not be deemed to be a waiver of the right to consent to any future transfer.

6.          Following an assignment, the tenant will remain primarily liable under the lease.  If the assignee defaults, the landlord may proceed directly against the tenant without the necessity of exhausting remedies against the assignee.

7.          The landlord may consent to subsequent sublettings or assignments or amendments or modifications to the lease by transferees without notifying the tenant, and without obtaining the tenant's consent thereto.  No such actions will relieve the tenant from primary liability under the lease.

VI.             CONCLUSION.

Under the common law and some state statutes, assignment and subletting create specific sets of rights among the landlord, tenant and transferee.   These pre-established results may be undesirable from the standpoint of the parties and the structure of a particular transaction.  Thus, drafting a comprehensive transfer clause plays an essential role in ensuring results consistent with the expectations of the parties.



[1]See Orchard Shopping Center, Inc. v. Campo, 485 N.E.2d 1248 (Ill. App. 5th Dist. 1985) (holding that where, as a term of a lease transfer, a Sublessee retains the right to terminate the sublease for any reason upon seven days notice, a reversion is retained by the transferor and, as a result, the transaction is a sublease). See also Indian Refining Co. v. Roberts, 181 N.E. 283 (Ind. App. 1932).

[2] Gateway Company v. DiNoia, 654 A.2d 342 (Conn. 1995) (fn. 8); Dolph v. White, 12 N.Y. 296 (1855).

[3]See 185 Madison Associated v. Ryan, 174 A.D.2d 461 (N.Y.A.D. 1991) (stating "[i]t is well settled that in order to relieve the original tenant-assignor from its continuing liability after assignment, it must be expressly shown that the lessor not only consented to the assignment, but accepted the assignee in place of the tenant and such release of the tenant must either be express or implied from facts other than the lessor's mere consent to the assignment and its acceptance of rent from the assignee").  But see, De Hart v. Allen, 161 P.2d 453 (Cal. 1945) (maintaining that an assignor/lessee of lease remains as primary obligor under the lease).

[4]See, e.g., Board of Commissioners v. Lions Del. County Fair, Inc., 580 N.E.2d 280 (Ind. App. 1991); Smith v. Hegg, 214 N.W.2d 789 (S.D. 1974); Gagne v. Hartmeier, 611 S.W.2d 194 (Ark. App. 1981); Rogers v. Hall, 42 S.E.2d 347 (NC 1947).  See also, M. Friedman on leases, § 7.303.

[5]See Drake v. Eggleston, 108 N.E.2d 67 (Ind. App. 1952). For minority view, see Minneapolis, St. Paul & Sault St. Marie R.R. v. Duvall, 67 N.W.2d 593 (N.D. 1954).

[6]V.T.C.A. Property Code § 91.005 (1995), discussed in 718 Associates, Ltd. v. Sunwest N.O.P., Inc., 1 S.W.3d 355 (Tex. Civ. App. 1999); Lawther v. Super X Drugs of Texas, Inc., 671 S.W.2d 591 (Tex. Civ. App. 1984).

[7]See M. Friedman on Leases, § 7.301 (citing Sooner Pipe & Iron Co. v. Bartholomew, 248 P.2d 225 (Okla. 1952)).

[8]See generally, Shropshire v. Prahalis, 419 S.E.2d 829 (S.C. App. 1992) (allowing a forfeiture remedy where the lease contained a forfeiture clause); Clasen v. Moore Bros. Realty Corp., 413 S.W.2d 592 (Mo. App. 1967); Artesia Medical Development Co. v. Regency Association, Ltd., 214 Cal App. 3d 957 (Cal 2d Dist. 1989); Twelve Oaks Tower I, Ltd. v. Premier Allergy, Inc., 938 S.W.2d 102 (Tex. Civ. App. 1997) (providing that under a Texas statute, failure by a tenant to obtain consent to assignment renders the lease voidable at option of lessor, and is not terminated unless landlord undertakes to terminate it, declare forfeiture or reenter). See also M. Friedman on Leases § 7.304.

[9]See Chessport Millworks, Inc. v. Solie, 522 P.2d 812 (N.M. 1974); Cities Serv. Oil Co. v. Taylor, 45 S.W.2d 1039 (Ky. 1932).

[10]See Klee v. United States, 53 F.2d 58 (9th Cir. 1931); Fink v. Montgomery Elevator Co., 421 P.2d 735 (Colo. 1975).

A few months ago, I had the good fortune of meeting Chris Michaud. 

Chris has extensive expertise in many areas of real estate,including (but not limited to) coaching investors, brokerage, marketing, residential rehab, land development, multi-family, private lending, options, leasebacks and more.

When I first met Chris, he told me about a fascinating strategy he has used to close deals with a creative financing instrument called the Lease-Option Purchase Agreement. I've known about Lease Options for a while, but he helped me to see some of its new applications, and why this strategy deserves some air time here on the REtipster Blog – because it can be an extremely beneficial tool for both parties in many real estate transactions.

Many people fail to recognize the incredible benefits of this type of agreement at first glance, but this type of creative financing arrangement that can be a game changer for many real estate transactions. 

Chris was kind enough to put together a guest post explaining the basics of how they work, so I wanted to share it with you today. Take it away Chris!

The Lease-Option Purchase Agreement is a creative and innovative way to open the doors of opportunity for both the sale and acquisition of real estate.

In many instances, it is seen as more of a “last resort” instead of the preferred solution for property ownership. While many prospective property owners would prefer to “own outright” by utilizing cash, or cash along with a conventional mortgage arrangement – most of these people don't realize that these methods often require a much larger financial investment than a Lease-Option, with substantially more qualification and out-of-pocket costs.

This clever and underutilized method of buying or selling real estate has actually been around for a long time and is used fairly often in the capital equipment and commercial real estate sectors. Why is this method underutilized and ignored in the residential sector? Because its advantages, processes, and risk factors are not well-understood by most buyers and sellers of residential real estate and consumers at large. Even those who do understand the Lease-Option Purchase Agreement don't always fall under the right circumstances to take advantage of this type of instrument.

When properly understood, the Lease-Option Purchase Agreement is an important financing tool that should be understood, so it can be utilized to complete transactions that offer the most benefits to buyers and sellers.

Disclaimer: Anyone who does real estate transactions of any kind needs a real estate attorney. These Lease-Options were utilized by the author for over 20 years, but keep in mind that all states have different laws and this is why you need legal advice in the state you are in. Let YOUR attorney adapt, tweak, discard, ignore or adopt what they wish from this conversation if it’s useful. You should also seek the advice of a good tax attorney to see what kind of tax law applies to your situation.

Lease-Option Purchase Agreement Defined

Lease-Option Purchase Agreements actually consist of a few agreements rolled into one, which is part of what causes confusion for some.

Wikipedia does a nice job of explaining the essence of how it works:

In a lease-option, a property owner and tenant agree that, at the end of a specified rental [lease] period for a given property, the renter [lessee] has the option of purchasing the property.

The full agreement usually consists of a Lease Agreement laying out the terms and conditions of the lease period, and an Option Agreement which explains the terms and conditions of the lessee's option to purchase, and recites any consideration paid, if any, for the right of having the option.

There may also be an additional document including an Escrow Agreement stipulating the terms and conditions that a third-party, often an attorney or trustee, may deliver title to the party who exercises the Option Agreement

The Right Time & The Right Place

Lease-Option Purchase Agreements can be beneficial for many reasons, they are not always the right vehicle to utilize. It's no substitute for good business sense and market savvy. The Lease-Option Purchase Agreement usually makes the most sense to use as a purchase vehicle in circumstances similar to the following:

  • The Buyer/Lessee has had a recent financial catastrophe, causing the conventional and government insured mortgage lender to shy away from them
  • The Buyer/Lessee has had a major medical expense that was uninsured.
  • The Buyer/Lessee has unpaid credit cards or a creditor dispute as a result of a recent divorce.
  • The Buyer/Lessee had a recent bankruptcy caused by unforeseen financial hardship.
  • The Buyer/Lessee recently moved to an area, and they have a good employment and credit record, but not in the present area long enough to satisfy most conventional lenders.
  • The Buyer/Lessee is self-employed and as a result, they under-report their income for tax reasons.
  • Certain income tax or inheritance tax situations sometimes suggest this arrangement in order to save substantial sums of money.

In addition to the above, there are real estate professionals who recommend the Lease-Option Purchase Agreement to Sellers of real estate that has been on the market too long. Often this type of “distressed” property is in a less-than-desirable area where the owner wants more than what the property is worth.

Similar to many seller financing arrangements, the use of a Lease-Option Purchase Agreement will oftentimes give the seller additional room to increase their asking price because of the “easy terms” they are offering to the buyer (and many Buyers/Lessees are willing to pay such a premium).

With a Lease-Option Purchase Agreement, the Buyer/Lessee will typically pay a non-refundable “option consideration” at the beginning of the Lease term. This is what gives the Buyer/Lessee the right to purchase the property at a pre-defined price prior to the end of the end of the lease term. If this “Option to Purchase” isn't exercised within the time period stated the in agreement, the property’s title rights will simply revert back to the original owner of the property.

Advantages for the Buyer/Lessee

There are several notable advantages for both parties under a Lease-Option Purchase Agreement. The Buyer/Lessee can benefit from the following aspects of a Lease-Option Purchase Agreement:

  • When a Buyer/Lessee doesn't have the sufficient cash resources available to cover a typical down payment and pay for the closing costs of a conventional loan (but they otherwise have good credit and the required income for the loan).
  • It allows the Buyer/Lessee to fix the home price now within the “Option to Purchase” portion of the agreement and avoid any escalation in home value that may occur over time.
  • In many cases, the Buyer/Lessee is allowed to apply a portion of their lease payments toward the down payment or purchase price during the lease term, which automatically builds their equity in the property if they choose to purchase (this benefit would not otherwise be inherent in a regular rental/lease agreement).
  • It allows the Buyer/Lessee to live in the property and experience the neighborhood and community prior to making the ultimate decision to purchase (many Sellers/Lessees view this as a detriment and as such, they will require a substantial “option consideration” as an upfront payment at the signing of the Agreement).
  • It often gives the Buyer/Lessee a greater sense of ownership responsibility and community participation, which is not usually as well associated with normal rent/lease arrangements.

Advantages for the Seller/Lessor

A Lease-Option Purchase Agreement contains a number of advantages for the Seller/Lessee as well. Some were already alluded to above, and there are several more listed below:

  • Vacant or “market worn” properties tend to develop a negative stigma over time, and the Lease-Option Purchase Agreement can be a vehicle to get the property occupied and “sold” faster.
  • The Lease-Option Purchase Agreement can eliminate a “double payment” on a Buyer/Lessee's former property or residence, allowing them to purchase their new property sooner, helping to eliminate much of the stress while moving.
  • In a down market, the Lease-Option Purchase Agreement can fix the price from a downward price spiral, while finding a worthy Buyer/Lessee prospect and helping to eliminate potential negative cash flow or even a negative cash sale in a severely depressed market.
  • The psychology of the Buyer/Lessee is often somewhat different from pure tenancy because the Buyer/Lessee has an equitable interest in any application of lease payments being applied towards equity, together with any value appreciation over the fixed price during the option term, and any non-refundable money they've paid for the option itself.
  • Since title remains vested with the Seller/Lessor until the exercise of the option portion of the agreement, there are distinct tax advantages for the Seller/Lessor that the Buyer/Lessee doesn't receive until the title is vested and becomes vested in the Buyer.

Good Business Sense

It's worth noting that this type of lease/finance vehicle doesn't have to be limited to the private sector. There are many opportunities for the public sector to rehabilitate distressed properties on the tax rolls in public and quasi-public joint ventures within the broader community where it could be used. From a risk perspective, it may even make more sense than a high risk no down payment mortgage.

The private sector and lending community have long recognized the value of equity building in the purchase of one's home. For many, that means a cash infusion that covers the down payment and closing costs. There is an equal possibility of a prospective Buyer/Lessee producing a little “sweat equity” either directly into the home itself and/or in a traded service possibility. Having a stake in the game saves a great deal of heartache and disappointment later on.

Additionally, there are a number of ways to vest partners into the “equity bond” of a potential Buyer/Lessee purchase. It would be entirely possible for the lease payment schedule to be adjusted to a reasonable degree to match the Buyer/Lessee's needs over the option term in order to accommodate their situation, provided they have a reasonable chance of accomplishing their goal.

Shared equity partnerships with the Seller/Lessee, or investment partnerships seeking tax equity advantages, graduated payment lease payments, direct deposit payment scheduling, dedicated default insurance premiums–even secondary marketing vehicles etc. all offer possibilities of limiting the “risk” factors as much as possible for the equity owner–the Seller/Lessee.

For the Seller/Lessee, it may be wise to have a curriculum for a prospective Buyer/Lessee regarding home ownership, maintenance, and budgeting. A “certification” and/or “graduation certificate” could be utilized to better assure the Seller/Lessor and any vested equity partners that their decision to offer such a finance option is well founded.

Conditions & Limitations

The Lease-Option Purchase Agreement itself should be reasonable to both parties and should incorporate terms that are enticing enough for the Buyer/Lessee to exercise their option to purchase. In addition, specific conditions and stipulations regarding a particular property can be included, provided appropriate legal counsel is sought.

The Lease-Option Purchase Agreement typically defines all or several of the following items:

  • Names and addresses of the parties
  • Legal contractual obligations for maintenance, taxes and utilities
  • Any deposit/consideration given for the lease or option
  • Price, and financial terms and conditions of the lease and option
  • Time period stipulations for both the lease and exercising the option
  • Any cost pro-rations or reimbursements
  • Definition, possibilities and/or cure for any default
  • And about anything else that two parties can legally agree to

Final Words

Often we heard from Buyer/Lessee/Optionee attorneys,

“That’s only a rental agreement, I can’t have my buyer sign that with an Option Fee of 20%, or more.”

In those cases, we would say,

“Fine, find something else, or maybe your attorney would like to finance you.”

The key to these transactions is that they require a fair amount of education for all parties, including attorneys in some cases. In a typical mortgage and often Contract for Deed sale, there are either foreclosure rights or rescission periods, similar in length to a foreclosure “right to cure.” In those scenarios when a Buyer/Lessee fails to make the payments, the onus of the legal costs often rest primarily upon the Mortgagor/Contractor.

In the Lease-Option scenario, the onus is upon the Lessee/Optionee to prove that they should not be evicted for non-payment of the lease payment, or if they want to claim foreclosure/rescission rights. Therefore, a shift of risk occurs to the Lessee/Optionee (where it should be), since they are the ones borrowing/optioning the asset.

Chris Michaud is a 30+ year veteran of the real estate business as a real estate investor, broker and industry insider with some lobbying experience at the state and national level. He is a sought after guest speaker and author, was a state REALTOR President-elect, an investor coach and trainer of the RealInvest Profit System. Chris began his real estate career in 1977. He has been licensed in Maine, New Hampshire, and Massachusetts and has held a number of real estate investments and interests throughout the United States and Canada. Be sure to check out Chris's new book (co-authored with John Agostinelli) entitled Easy Money and the American Real Estate Ponzi Scheme.

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