A lease is a contract that obligates a landlord and a tenant for a set period of time. The parties to the lease should examine the document closely prior to signing it. If there is something in the lease a party does not prefer or agree with, they may attempt to negotiate the issue prior to signing the lease. This is possible even if a boilerplate, or generic, type of lease is used.
In most cases, leases are for one year terms. They will contain information such as:
- The dates the lease begins and ends;
- The amount of monthly rent payments due;
- The date of the month rent is due;
- Rules and regulations for living on the property;
- Options, if any, for early termination of the lease; and
- Typically, a clause regarding how disputes arising from the least will be handled by the parties, such as arbitration.
A lease may also contain provisions regarding prohibited activities or uses of the property. These typically include:
- A limit on the number of individuals who can live on the premises;
- A prohibition on using the unit as a home business;
- Pet prohibitions or rules if pets are allowed;
- A prohibition on sub-letting or assigning the lease; or
- A restriction on illegal activities.
Other lease provisions an individual should look for in their lease 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;
- Is there a lien on personal property for failure to pay rent or cause damage; or
- How and when the landlord can enter the property.
What is a Lease Purchase?
A lease purchase is a property lease for a fixed period of time, typically 12 to 24 months. It may also be known as a rent-to-own agreement or a lease-option. It contains an obligation for the tenant, or renter, to purchase the property at the end of the lease period. Each time the renter makes a rent payment, a portion of that payment is applied to the future down payment for purchase.
A lease purchase is different from a lease option because a lease purchase requires the individual to purchase the property. The price of the property the renter will be required to pay should be specified in the lease.
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 a period of time, usually 12 to 24 months. If the tenant exercises the option, a portion of their rent will be applied to the down payment for the purchase of the property.
A lease purchase option may appear in a lease or rental agreement or it may be a separate document. Regardless of the format, the lease purchase option must include:
- The option fee;
- The duration of the option period;
- The purchase price of the property; and
- Compliance with local and state laws.
In order for the lease purchase option to be enforceable, consideration must be given for the option to purchase. It cannot be nominal, such as $1, but it is up to the parties to determine the amount. It will typically depend on the price of the home and 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, 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 of time, such as years, the parties can agree to reevaluate the value of the home. This is due to market fluctuations and a desire for fairness.
In some states, there are laws that prohibit individuals from entering into contracts they do not understand. For example, laws may require an option contract to contain clear wording in a specific size that informs a tenant of the possibility they may forfeit their option fee.
Similar to the lease purchase agreement, a lease option usually restricts the right to transfer or sell it to another individual. The ability to transfer or sell the least option may be negotiated prior to signing the lease.
Can a Lease Purchase Be Transferred or Sold to Another Person?
In most cases, a lease purchase agreement restricts the tenant’s right to transfer or sell the lease purchase to another individual. The ability to transfer or sell the lease purchase may be negotiated prior to signing the lease purchase agreement. It is important to review the lease purchase agreement carefully to determine if there are any restrictions.
Why Should I Use a Lease Purchase Agreement?
A lease purchase agreement includes benefits for both the buyer and the seller. Benefits for a buyer may include:
- The buyer must only have a small amount of cash up front, as compared to a traditional home purchase. It generally includes:
- the first month’s rent;
- a security deposit; and
- a non-refundable fee to purchase the lease 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, essentially providing the buyer a discount on the property; and
- This type of purchase may allow a buyer to purchase a property they would otherwise have been unable to afford.
There are also benefits for the seller, which may include:
- The ability to charge a higher monthly rent than the market rent in the area;
- Getting a better price for the property that the seller would in a traditional home sale transaction;
- The tenant is more likely to treat the property as though it was theirs and keep it in better shape; and
- 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 gives them credit towards the down payment.
Do I Need a Lawyer if I Want 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 assist you in negotiating the terms of the lease purchase, review the lease and ensure your rights are protected, and represent you during any disputes that may arise out of the lease.
It is always advisable to have an attorney review any significant documents prior to signing them, especially in cases like a lease purchase agreement, which binds you to spending a large amount of money. It is much better to try to resolve any issues prior to signing the lease purchase agreement. In some cases, if the seller is unwilling to negotiate, it may be necessary for you to find another property that suits your needs.