Lease Option renewal

16 Replies

So I have a tenant buyer in a house right now. They are 1 year into their 2 year lease agreement and their option to purchase agreement states they can purchase any time during those 2 years. They just informed me that they are not going to be able to buy in the 2 year time period and want to know if we can renew their contract for at least one more year. I'm fine with letting them do this because its cash flowing well for me and I don't have to handle any maintenance on the property so the longer they stay the better as far as I'm concerned. My question is, to renew their lease agreement and option to purchase agreement, do I require another non refundable deposit or does that just roll over? It seems like charging them another deposit in order to stay would be a little crooked but if it went directly toward the purchase price then maybe its not so crooked. I don't know how this is typically done.

Also, if the tenant wants to pay extra money once in a while and have it go towards the purchase price (and I'm ok with that) should I provide a different receipt for that payment? How do I document that they paid extra and reduced the agreed upon purchase price?

Any thoughts or related experiences? Thanks in advance!

@Jordin Boyd

Make sure you know the NC statute on LOs

Create a brand new lease and separate option, 12 mo on lease and separate option at a price you both can live with.

I would have the option price reflect a sales price based on today's appraisal or CMA less option payments paid but optionee is responsible for seperate down payment for FHA financing

Originally posted by @Jordin Boyd :

So I have a tenant buyer in a house right now. They are 1 year into their 2 year lease agreement and their option to purchase agreement states they can purchase any time during those 2 years. They just informed me that they are not going to be able to buy in the 2 year time period and want to know if we can renew their contract for at least one more year. I'm fine with letting them do this because its cash flowing well for me and I don't have to handle any maintenance on the property so the longer they stay the better as far as I'm concerned. My question is, to renew their lease agreement and option to purchase agreement, do I require another non refundable deposit or does that just roll over? It seems like charging them another deposit in order to stay would be a little crooked but if it went directly toward the purchase price then maybe its not so crooked. I don't know how this is typically done.

Also, if the tenant wants to pay extra money once in a while and have it go towards the purchase price (and I'm ok with that) should I provide a different receipt for that payment? How do I document that they paid extra and reduced the agreed upon purchase price?

Any thoughts or related experiences? Thanks in advance!

 Since you're happy with them and it's cash flowing, all you would have to do is print out another copy of the original agreement and just change the dates and everyone initials the changes.  You could write in a clause that says the parties agree to extend the original date by however many years.  And sign again and date it again.  

Contracts just need to be clear.  They don't have to be fancy.

 No need for a separate receipt for the additional money paid, in my opinion.  You could just do one receipt that shows how much they paid, and how much was applied to principal, and current balance.  When I had an owner contract on a condo, and I paid extra toward my mortgage with them, they just showed that on the next month's invoice, which showed the current balance on the loan.

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In this case I agree with @Sue K. , just make it simple and do another lease agreement.

For the future, consider putting in an extension clause.  We extend an additional year for an extension fee.  They are always willing to pay the fee, and no, it does not go towards their purchase price, it's just an extension fee.  But, this is something that is drawn up in the original paperwork so it's clear from the start.

Nice. Ok. Thanks @Sue K. Now what if I want to use this as an opportunity to renegotiate some aspects of the contract. For example, I won't be making much off the final sale as it is because I still owe quite a bit on the property myself so I'm thinking this would be a good time to change the amount that goes toward the purchase price each month. Any foreseeable issues with renegotiating that?

@Jordin Boyd , my understanding is that IF they pay a non-refundable option fee (separate to their lease contract), usually, NONE of their monthly rent goes towards the purchase price. (ie. Why should the Seller need to be a withdrawal account for their tenant)? Then, if they don't want to renew the option, again, none of their rent goes towards purchase. Is that incorrect?...

@Jordin Boyd We do it the way @Brent Coombs described.  None of their monthly rent goes towards the purchase price.  The reason being that once you give any amount towards the purchase price it can be seen as owner financing, and if you need to evict them one day the judge may see it as them having equitable interest in the property and therefore you may need to foreclose instead of evict.  We have evicted two lease option tenants with no problems because we have two separate documents, one is the lease and the other is the option.  It clearly states that if the lease is violated the option is null and void.  

Another reason we don't give monthly credits towards purchase price is because of the changes to Dodd Frank back in January 2014.  My partner is more well versed in that area and apparently it's open to interpretation so because its pretty new we decided to avoid it all together.

With all that said, I think now is your time to renegotiate terms with your tenant buyer.  You have the final decision in renewing with the for another year or not, so go ahead and set the terms you want for the renewal.  I don't see anything wrong with that.  Just make sure every detail is clearly written out, and if I were you I would notarize the new documents.

Great stuff. Thanks everyone! Yeah I was just checking the two separate contracts (lease contract and option to purchase) and neither says anything about the a certain portion of the rent going toward the purchase price. But I did tell them that would be the case and I sent them an email with that bit clearly stated so, I think what I will do is update the dates on the original contracts and have everyone initial but also update the sale amount to reflect the amount that has been going toward the purchase price each month for the two year term. Then I will confirm with them again just through email that there will no longer be any amount toward the purchase price under the new agreement. That way I honor what I told them I would do even though it wasn't in the contracts and then we are clear moving forward that no more monthly amount is going toward sale price.@Priscilla Z. @Brent Coombs .@Sue K. Does that all sound about right? Thanks so much for your input!

@Jordin Boyd , to avoid the foreclosure/eviction dilemma mentioned by @Priscilla Z. , I suggest you double check what you promised in emails outside the Contracts. eg. If they don't proceed with the purchase, did you infer that their payments towards purchase price would be refundable? 

If they have been given that impression, AND they have already told you that they are not renewing their purchase option within the agreed time frame, I would suggest either offer to pay them back that portion, or, offer to convert the extra purchase portion payments into additional ahead-of-time normal lease payments. Hopefully, you won't have given a promise to refund.

If on the other hand there is no inference of refundable payments once their option is foregone, I suggest making it clear in your next written communication that their payments aren't refundable... 

@Jordin Boyd in NC, a residential lease combined with an option to purchase is treated like a mortgage (meaning you may have to foreclose on the tenant's equitable interest in some cases if things go sideways before the option period ends) and the penalties to the OWNER/LANDLORD are severe if you do not follow the statue to the letter. See chapter 47G of the North Carolina general statutes.

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@Jordin Boyd  -- are you a "shoot first, ask questions later" kind of person or the other way around? Some investors are one way, some are the other....In the case of structuring lease agreements, lease/purchase, lease options...I recommend at the very least knowing what the law says. NC law tightened up and clarified language quite a bit in 2010. Here are some highlights to consider:

1. Your Option needs to be recorded.

2. Part of the language in the Option needs to be in at least size 14 font in bold (seriously)

3. I've done some deals where I had payments completely separated out (rent vs. applied toward purchase), and some deals where part of the money went toward the rent and part went toward the purchase. My take is that it's primarily a business decision. Just know the risks if there is a default and how it may look differently if the tenant/buyer has some equity in the deal. I say primarily a business decision because you do need to keep an eye on the NC law and Dodd Frank Safe Harbor items. There are excellent REI attorneys who can help. **Also, if you go to Small Claims Court (under $10K), you'll end up with a Magistrate presiding. You never know how the Magistrate is going to interpret the law and the situation--I had a deal where a guy tried to not pay me an Assignment fee and the Magistrate ruled that the guy was a victim and didn't need to pay (essentially....he was broker-repped).

4. In your particular circumstance, the danger of extending a year without charging something for that right is that you are setting a precedent. It's costing you money. Like Brian Gibbons points out, you are also playing with the fact that prices/values might fluctuate that far out. 

Here's the language from 2010 that's worth reading:

The option contract is now required to be in writing and given to purchaser. Further, the option contract must be recorded by the seller at the register of deeds within five business days after signing by both parties. In the alternative, the seller can record a "Memorandum of Option Contract," which must contain the names of the parties, the signature of the parties, a description of the property, the time during which the option must be exercised, and a statement that the purchaser has the right to cure a default once every twelve months.

The option contract itself must contain:

1) full names and address of all parties to the contract;
2) the date the contract was signed by each party;
3) a legal description of the property to be conveyed subject to the option;
4) the sales price of the property;
5) all fees or payments paid by each of the parties including the option fee;
6) all duties whose breach will result in forfeiture of the option;
7) the time period during which the option may be exercised;
8) a statement of the rights of the purchaser, including the right to cure a default once during each 12 month period; and
9) a statement in at least 14 point boldface directly above the purchaser’s signature, that the purchaser has the right to cancel the option any time prior to midnight of the third business day following the signing of the option.

What happens if the purchaser defaults?

In the case of default, as stated above the purchaser has the right to cure once every 12 month period. The seller must be given at least 30 days from receipt of the notice before he is evicted or loses the option. Additionally, the seller must provide a written notice of default that advises the purchaser of:

a) the nature of the default, including the amount if the default is a failure to pay;
b) the date by which the purchaser must cure the default or the option will be forfeit; and
c) the name and address of the seller or the attorney for the seller.

The notice of default must be served by hand, sheriff, or certified mail or equivalent.

What if the purchaser does not remedy the default?

The seller must obtain and record a mutual termination executed by both the purchaser and the seller, or obtain a judgment by a judge of competent jurisdiction that terminates the option and extinguishes the purchaser’s right of redemption. The judgment must be recorded at the register of deeds as well.

After the default notice has been served, and not cured within 30 days if it is the purchaser's first default of the year, the seller may move forward to cancel the option and the purchaser's equitable right of redemption by either:

a)filing an agreement terminating the option, signed by all parties, at the register of deeds; or
b)obtaining a court order terminatng the purchaser's option, and filing the order with the register of deeds.

What if the seller defaults?

If the seller defaults on a loan secured by the property during the option period the purchaser may cancel and rescind the option contract. The seller will have to return all monies paid by the purchaser under the option, less the fair market rental value of the property while it was occupied by the purchaser and compensation for any damage to the property by the purchaser that is beyond normal wear and tear.

What are the penalties for violating the act?

A violation of this act is an unfair and deceptive trade practice subjecting the seller to treble damages and attorney’s fees, as well as equitable and declaratory relief.

Are there any other changes taking place?

YES, there are new rules governing purchases with lease backs, and installment land contracts. You should read the act in it is entirety and/or contact the writer or other competent legal counsel. In future posts I will address these other changes.

What I learned when I studied law (got a Bachelor's not a JD), is that the law is fair, and the measuring stick for everything is whether or not a sane person would think it sounds "reasonable."

Telling someone they are buying a property, and then telling them that none of the money they are giving you is going toward the purchase price - does not sound reasonable to me.

I'm no expert on the ins and outs of lease-options, but I have done a few owner financed deals.  

I think trying to separate the two is not "reasonable."  These people believe that they are buying your home.  And just like my owner-financed deals, if they default, they lose the house.

Trying to get around an owner contract by saying it's really a rental agreement does not sound right, fair or reasonable.  And even without knowing any specific statutes, because I know the law is fair and reasonable, I can assume with a good amount of confidence, that it would also be against the law.

A lot of tenants and buyers of lease-options, are not savvy on the above.  So, many landlords/owners get away with murder.  But, find one who is savvy enough to look up the law, or can scrape together enough money to hire a lawyer, and you're in trouble.

So, my advice is to give them a deal that you would be happy to get, were you in their shoes.  You don't have to give them more than is fair.  But, it's my opinion that you should give them something that is a deal you would also be happy to get.  

Fair and reasonable.  

My advice to people is to always imagine you are a judge and this story is presented to you.  Judges are not stupid people.  And their job is to be fair.  If you were the judge hearing your situation, would you think it was fair and reasonable?

If your brain starts trying to figure out how to justify something, rather than immediately being able to say, "Yes.  I would consider that deal fair and reasonable from either side," then there is your answer.  The right answer is the one that is not complicated.  It is easily and obviously fair and reasonable to a rational person.  So, that's your test.

So, in my opinion, it would be fair to require them to stick to the original deal. Even if they can't make it happen.  That was a fair contract that they agreed to.  

But, to use the opportunity to screw them over completely - and telling them none of their payments go towards the purchase would be screwing them over in my opinion - would be a royally nasty thing to do.  Hence, you would encounter serious karma consequences, if not legal ones. ;-)