Unraveling The Lease With An Option To Purchase

David Degnan

Owner, Degnan Law, PLLC

Real estate agents should take note: a lease with an option to purchase is three contracts – not one. The Agreement contains an option contract, a lease contract and a purchase contract. These separate contracts are explained as follows:

An Option Contract
In exchange for certain consideration, the tenant / buyer may contract to bind the landlord / seller to purchase the property for a specific period of time at a specific price. For example, the owner may pay $50,000 for the right to purchase the property within the next three years at a price of $250,000. These option agreements may be assigned to another party, unless otherwise stated.

Lease Contract
The lease contract is separate from the option contract or the purchase contract. The tenant does not have a present ownership interest in the property until he exercises the option. As such, the tenant should pay a security deposit that is separate from the option contract. Moreover, the parties must clearly define how a default (and eviction) affects the option contract and the purchase contract.

Purchase Contract
If the option contract is timely exercised, then the parties may create a purchase contract. At that point, the landlord conveys the property to the tenant / purchaser under the terms set forth in the separate purchase contract.

Each agreement must stand on its own; otherwise, the owner will be left with an untold level of uncertainty and ambiguity.

Unfortunately, owners continue to use a form contract that attempts to combine the option, the lease and the purchase into one contract. In these cases, the option is confused with the security deposit, defaults under the lease and option are confused and the maintenance responsibility of the tenant is often left unexplored until the roof separates from the structure (or worse).

When one contract is used, disputes and litigation happen. As such, it’s important for real estate agents to advise their clients to use the right contracts to eliminate ambiguity and clearly define the parties’ obligations with lease with option to purchase agreements.

David Degnan is a real estate and fractional ownership attorney and has experience prosecuting and defending noise complaints. David can be reached at d.degnan@degnanlawaz.com or phone at 602-818-4813.