Lease Purchase Laws

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 What is a Lease?

A lease is a legal, binding contract outlining the terms under which one person agrees to rent property owned by someone else. Most leases are for real property, such as apartments, but almost anything can be the subject of a lease (automobiles are a common example). The lease guarantees the tenant’s use of the property and guarantees the property owner or landlord regular payments for a specified period.

Leases can be complicated, and they are often written in technical legal language. For that reason, it is a good idea to hire a lawyer to review a lease before it is signed. In any event, the parties to the lease should examine the document closely before signing it. If there is something in the lease a party does not agree with, they should attempt to negotiate the issue before signing the lease. This is possible even if a boilerplate or generic type of lease is used.

The lease will contain information such as:

  • The dates the lease begins and ends (most leases are for one year)
  • The amount of monthly rent that is due and the date by which it must be paid
  • Options, if any, for early termination of the lease
  • Rules and regulations for living on the property
  • A clause requiring the parties to handle disputes about the lease in arbitration rather than litigation

Other standard lease provisions include:

  • How and when the security deposit is refunded at the end of the lease
  • Who is responsible for paying for the utilities
  • Who will perform the maintenance and repairs
  • How and when the landlord may enter the property

A lease may also contain provisions regarding prohibited activities on the property. These often include:

  • A limit on the number of individuals who can live on the premises
  • A prohibition on using the unit as a home business
  • A prohibition against pets or rules to be followed if pets are allowed
  • A prohibition against subletting or assigning the lease
  • A prohibition against carrying out any illegal activities on the premises

What is a Lease Purchase Agreement?

A “lease purchase” agreement (also known as a rent-to-own agreement) is a lease that contains an obligation for the tenant, or renter, to purchase the property at the end of the lease period for a predetermined amount of money. Each time the renter makes a rent payment, a portion of that payment is applied to the required payment for purchasing the property.

There is a similar type of agreement called a “lease option.” This contract gives the tenant the right to purchase the property at the end of the lease term, but unlike a lease-purchase agreement, it does not require the tenant to do so.

Is a Lease Purchase the Same as a Lease Option?

No. As noted above, a lease-purchase agreement requires the tenant to purchase the property. A lease option, on the other hand, gives the tenant the option to purchase the property after some time, usually 12 to 24 months. If the tenant exercises the option, a portion of their rent will be applied toward purchasing the property.

A lease option may appear in the rental agreement, or it may be a separate document. Regardless of the format, the lease-purchase option must include:

  • The amount of the fee that will be charged if the tenant exercises the option
  • The duration of the option period
  • The purchase price of the property
  • Anything else that is needed to be compliant with local and state laws

For the lease option to be enforceable, the tenant must give consideration to the option to purchase. The amount is flexible. It cannot be nominal, such as $1, but it is up to the parties to agree. Typically, more expensive properties require a larger fee. The fee can range from hundreds to thousands of dollars. This fee is usually non-refundable.

Although the duration of the option period must be clearly stated, there are no restrictions on what it must be. It can range from months to years. If the tenant fails to exercise the option by the time the option’s duration is over, they forfeit the option fee.

The purchase price of the home must be stated in the lease. If, however, the option term spans a long period, and the value of the property is likely to be subject to market fluctuations, then out of a desire for fairness, the parties can agree to reevaluate the price of the home when it becomes possible to exercise the option.

Like the lease-purchase agreement, a lease option usually restricts the right to transfer or sell the option to another individual. Of course, that may be negotiated before signing the lease.

Why Should I Use a Lease Purchase or Lease Option Agreement?

A lease purchase agreement includes benefits for both the buyer and the seller. Benefits for a buyer include:

  • This type of purchase may allow a buyer to purchase a property they would otherwise have been unable to afford.
  • This is because the buyer does not have to come up with a large down payment to purchase the property, as is true in a traditional home purchase.
  • The rent credit the buyer pays each month builds their down payment. In most cases, the rent credit is 10% to 20% of the monthly rent payment
  • The value of the property may increase during the lease period, meaning that since the buyer only has to pay the purchase price outlined in the lease agreement, the buyer is paying less for the property than what it is worth

There are also benefits for the seller, which include:

  • The ability to charge someone who wants to buy the property a higher monthly rent than the market rent in the area
  • The seller may get a better price for the property than they would in a traditional home sale transaction
  • The tenant is more likely to treat the property as though it were theirs and keep it in better shape. This will be important if the tenant decides not to exercise the option to purchase the property.
  • The ability to sell the property even in a slow market. In many cases, prospective buyers who cannot afford a down payment can afford the monthly rent payments, which will add up to a portion of the purchase price.

Do I Need a Lawyer to Enter into a Lease Purchase?

Yes, it is essential to have the help of an experienced real estate attorney when entering into a lease purchase. These types of transactions can be very complex. A lawyer will either write the lease-purchase agreement or will review the lease if it has already been drafted. Your lawyer will ensure that your rights are protected and will represent you during any disputes arising out of the lease.

A lease purchase agreement binds you to spend a large amount of money. It is much better to try to resolve any issues before signing the lease-purchase agreement. A good attorney will be a tremendous asset to you in negotiating the terms of the deal.

In some cases, if the seller is unwilling to negotiate, it may be necessary for you to find another property that suits your needs. Your lawyer can give you advice about that.

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