Can A Tenant Exercise Their Option When In Default On Lease?

I think we can all agree that in a L/O deal, the lease and the option agreement should be separate documents. Also, the lease should not reference the option agreement anywhere in the document.

However, if the tenant-buyer is evicted and the lease is thus broken, does the tenant-buyer not have the right to still execute his option to buy the property? If the option agreement is a separate contract, can the lease truly be a condition in the option agreement?

The only solution I can see is to put the option agreement contingent on the fulfillment of the lease agreement, or for the lease agreement to still be in good standing. Is this how this should be done to protect the investor?

iglooman

Comments(8)

  • 64Ford7th September, 2003

    In the lease option I use, it clearly states if the tenant is even late by 5 days, they lose their rightto purchase, and their option money. It is a great motivator to have them pay on time!

  • appelgw11th September, 2003

    I am seriously confused. Where's the bad side of letting them exercise their option?

    -You own a property and do a L/O.
    -The Tenant defaults so you retain all deposits + the rent they've paid
    -The Option holder (tenant) decides they want to exercise their right to buy the house
    - If they carry through, you make the back-end profit that was your intial intent all along!

    The only fear I have on this deal is they take too long to close. In my humble opinion, talk nicely with them. Ask them how sincere they are about purchasing. If they're very serious, they should have no problem putting some money into escrow as an additional deposit, even if it's only $500. This would make me be willing to take the property off the market for the 30 days it takes them to close. If you're really pushy about it, I'm sure you can tack on the "missing" rent payments to the purchase price.

    Remember why you're doing this. To make a profit while helping people buy and sell houses.

    Greg Appelt

  • Dreamin11th September, 2003

    My lease docs only state what is required to keep the lease good and what "default" is. No mention of option to purchase.

    My option agreement references the lease and states "all requirements of the lease must be met in order to exercise the Option, if there is any violation of terms of lease or tenant is in default of the lease in any way the option money and rights to exercise are void and option money (s) are retained by the owner ec.....

    I have my atty check all my docs each time I make an option agreement for legallity ect... all my leases are pretty standard same form.

    hope this helps.

    ADDED note: If you put both in a the same document you may get into a situation that if you needed to evict for nonpayment of a lease a court may decide you have to foreclose becuase this is seen by the judge as a purchase. I have heard on only one instance where this happened so I personally opt for a stand alone lease with a separate Option to buy with the lease referenced.[ Edited by Dreamin on Date 09/24/2003 ]

  • jorge12111th September, 2003

    this is the downside of separate documents that don't reference each other. standing alone it appears that the tenant simply has an option to purchase the property. in light of the fact that the whole point of a lease option is to eventually sell the property after you've been receiving above market rents for a while, i would not oppose their intent to exercise that option.

    J

  • jhgraves11th September, 2003

    I personally have never used seperate documents for that very reason. If they are together they live and die together, depending on the drafting. No evidentiary problems if all the terms are within the same four corners.

  • gold11th September, 2003

    What I get out of reading the above is, maybe you should reference the lease agreement in the option agreement but not reference the option agreement in the lease agreement?

  • SavvyYoungster11th September, 2003

    I was under the empression that if the 2 contracts reference each other, the TB can avoid eviction by appearing in court with the option agreement. That is what the separate contracts is trying to avoid.

  • jhgraves11th September, 2003

    I think I see what you are saying but I think you have to draft your L/O with that contingency in mind, the one I use goes a little something like this:

    25. Exercise of Option.
    Provided the Lessee is not in default in this Lease, the option to purchase herein granted may be executed by Lessee at any time within the Option Period by written notice from Lessee to Lessor given in strict accordance with the provisions of Paragraph 42 herein below. For purposes of this Agreement, the Option Period shall mean that period of time from July 1, 2003, to and ending at 5:00 p.m. CST, January 1, 2004.

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