EVICTION QUESTION:
Hi all,
I have a lease Purchase property that the ocupant signed a promissary note for half of the Option consideration money, however, never came through with the money as promissed. They are keeping the note paid, although, I really want to get someone who can cash me out. My question: Is the fact that the Option consideration money was never fully paid a reason for eviciton?
Tks,
mac 
Your question should be answered by a real estate attorney. Having said that, I would add that the provisions of the written agreement(s) you have with the tenant/buyer should contain a definition of default and what your available remedies are. Each state has its own laws relating to landlord/tenant matters, including eviction.
Thanks Nancy. . . Yes, Prepaid Legal will help me through this. Another seminar without leaving home. I even recorded the lease signing for quality and training purposes and read the details and had them sign a statement of understanding. So, I TRIED to do my due diligence. .
tks,
mac
I don't quite understand the situation.
The lessee/optionee signed a note for half the option consideration, but didn't remit the money to satisfiy the I.O.U..
What note are they keeping current???. Do you mean that the monthly lease payments are being kept current????
In any case, this may void their option. You may be able to demand payment of the balance due on the promissory note.
On the other side of the coin, these tenants have not violated their lease agreement. They can remain there until their lease expires. Then you can notify them that you are not going to renew their lease.
To try to evict them now will not be easy. You would have to show why they are being evicted. You will have to show that they violated something(s) in the lease agreement.. And you need to give them an opportunity to cure that situation. You just can't evict without cause. A default of the option to purchase is not a reason to evict. the tenant.
Yes, the Lease payment is being kept up, however, I failed to tie a stipulation within the lease for non-payment of the promissary note as I was so intent on keeping the Option and Lease seperate. therefore, lesson learned. Certified check for the Option consideration BEFORE you move in. I still have a 400 per month positive and half the option as well. . . Thanks,
mac
Quote:
On 2004-02-03 15:29, wannice wrote:
Thanks Nancy. . . Yes, Prepaid Legal will help me through this. Another seminar without leaving home. I even recorded the lease signing for quality and training purposes and read the details and had them sign a statement of understanding. So, I TRIED to do my due diligence. .
tks,
mac
Wannice,
Good for you for doing that!
Don't know about TN, but when I've represented property owners who have been approached by prospective tenants wanting to lease with a purchase option, I've always recommended that the owner structure the deal as a purchase with extended settlement date, buyers occupying the property prior to settlement pursuant to the lease (that is attached to and incorporated by reference in the purchase agreement). I feel the owner is better protected this way. Tenants wanting a purchase option, in my experience, just want to move into the property and limit owner's ability to sell to someone else so that they (tenants) won't be displaced when the lease runs out. If the deal is structured as a purchase with pre-closing occupancy by virtue of the lease, if the buyer/occupant breaches any provision of the purchase agreement (or lease), the owner may have a stronger shot of having them evicted. Then it's more a question of buyer defaulting under sale contract, as opposed to just a landland-tenant issue.
I don't believe you have grounds to evict unless it explicitly states in the lease that failure on option consideration is a breach that will result in eviction.
As others have said, you might check the laws in your state but I doubt that eviction can be done without explicit verbiage in the lease. The main reason for my belief is that I was taught to use two contracts-- one for the lease and the other for the option. Without reference of one in the other they are stand alone contracts.
Hello Nancy and thanks. . . I love the suggestion and will ponder it and forthcoming verbiage, however, what about the differentiation of option consideration vs. down payment; my understanding is the two need to be kept seperated as much as possible to protect us from the potential refund if a confrontation in court occurs.
Wannice
wannice,
If the deal is structured as I previously laid out (purchase with extended settlement date and pre-closing occupancy via a lease), there is no "option" because the buyer must buy the property, albeit at some stated date in the future. The person is a buyer, not a tenant, and must close on the property and if the buyer does not, buyer would be in default (and owner, presumably, under the purchase contract, gets to keep any down money as liquidated damages).
On the other hand, if the deal is structured strictly as a lease with the tenant having the first right to buy the property in exchange for paying an option fee, then I think the issue comes down to the verbiage used in the written agreements signed. One question would be: would you rent to someone only where they expressed a desire to have a purchase option? If the answer is you would lease to them regardless of whether they wanted a purchase option, then I agree the option and lease agreements should be separate (although as you said, you would collect all of the option fee before letting them have possession). However, if you would only lease to someone interested in buying the property, why do a lease option to begin with? Why not say "you can buy this property on this price, these terms, long settlement date, etc."?
The lease option scenario viewed from the owner's perspective is completely different from the perspective prevalent on this site, which is the buyer's perspective. However, I would never advise my seller clients to grant a lease option. I would urge them to do straight sale with long settlement. And collect down money and require pre-approval for mortgage. That tends to separate the men from the boys.
Hey Nancy,
HUGELY informative. . I sit here reading this and wonder how this could be captured in a succinct manner and delivered to other investors with a generic word doc template and educate them in a brief 8 hour seminar. . I'd like to dialog a little more privately.
tks,
Wannice
One problem of a Purchase with extended closing is that now instead of an evicition of the party you possibly have a foreclosure to contended with.
The buyer if she is uneducated and without resources may go quietly. However, if she had good advice you would be in for a real court battle. The court would probably kick this out of their eviction courtroom and send it over to the equity judges.
The purchasers can show without a shadow of a doubt they have an equitable interest in this property. A breach of a purchase contract will not be resolved by an evition but rather by judge and jury. You calculate the cost and delays of that scenario.
A half decent attorney in spite of the contract breach can delay and delay and delay this thing in court.. They may stop making monthly payments for a couple of years while the Lis Pendens chugs its way through the court(s). There may be the issue of violation of state Usury laws, triple damages,etc.etc. You may have a lot to lose and nothihg to gain.
Not a good approach.
Hey Sammy,
Thanks for your input as well. . . I am still under the mindset that keeping the Option Consideration money-option agreement and the Lease seperate. If I hadn't allowed them to move in without the full option payment, this would be a non-issue. Another incident; after accepting a personal check on a long weekend and allowing the individual to move in only to have the 6K option money check bounce the following week I am VERY cognizant of the snafu's that can happen and I won't be easily fooled again. . .
You're learning!! The experts always recommend that the first check be in the form of a cashiers check or money order. I've violated that advise but wont once I get burned. Some people just have to get burned before they learn not to play with fire.
One of the cardinal rules of negotiating is, "goods and services are always more value BEFORE they are rendered than AFTER the fact". I'll never let them move in without the full option consideration. If they don't have it upfront then in 99% of the cases I don't waste any more time with them. It's NEXT. Best of Luck.
Quote:
On 2004-02-04 11:48, sammyvegas wrote:
One problem of a Purchase with extended closing is that now instead of an evicition of the party you possibly have a foreclosure to contended with.
The buyer if she is uneducated and without resources may go quietly. However, if she had good advice you would be in for a real court battle. The court would probably kick this out of their eviction courtroom and send it over to the equity judges.
The purchasers can show without a shadow of a doubt they have an equitable interest in this property. A breach of a purchase contract will not be resolved by an evition but rather by judge and jury. You calculate the cost and delays of that scenario.
A half decent attorney in spite of the contract breach can delay and delay and delay this thing in court.. They may stop making monthly payments for a couple of years while the Lis Pendens chugs its way through the court(s). There may be the issue of violation of state Usury laws, triple damages,etc.etc. You may have a lot to lose and nothihg to gain.
Not a good approach.
Sammyvegas,
Perhaps I didn't make myself clear.
When I said structure the deal as a purchase with an extended closing date, I meant that the owner would not convey title to the occupant of the property until some date in the future. Thus, there would not be a foreclosure issue because the owner hadn't conveyed title, no new mortgage in place, etc.
Furthermore, if the deal is structured as a purchase instead of a lease option and the buyer/occupant breaches the purchase contract, the buyer has defaulted under the purchase contract. The contract is terminated, the buyer therefore no longer has any equitable ownership interest in the property, the owner has the remedies against the buyer as set forth in the purchase contract, including the right to get the buyer out of the property (since presumably, the purchase contract laid out that one of seller's remedies in the face of a buyer default is the immediate right to reclaim sole possession of the property).
Where the purchase contract is dead on its face (in this case because the buyer defaulted), I don't see any grounds for issuing a lis pendens.
In addition, I don't know how you're coming up with triple damages and usury.
Wannice,
Concerning your last post, I guess my feeling is if I gave a lease option to tenants and their option fee check bounced:
1. are these people really qualified to buy my property?
2. even though so far these people are current on the rent, when is that other shoe going to drop?
I realize that this is all after the fact because you have sold them an option to buy your property. I am only suggesting in the future on another property that you consider not granting someone a lease option but structure it as a sale. Of course, be guided by what your attorney tells you, but my gut says you would thus be on better ground for all the reasons I have posted previously in response to your topic.
NancyChadwick:
““When I said structure the deal as a purchase with an extended closing date, I meant that the owner would not convey title to the occupant of the property until some date in the future. Thus, there would not be a foreclosure issue because the owner hadn't conveyed title, no new mortgage in place, etc.””
Nancy, there is no need for conveyance of title. Nor is there necessity for a mortgage. Lastly, this is not an occupant, it’s a purchaser. A purchase in all cases where there is equity in the transaction immediately establishes an EQUITABLE INTEREST in the property. That interest can be derived from the difference between the Fair Market Value and the contract price, the down payment, the monthly installments, www.etc.etc/
You, Nancy, live in Lien theory state. Here’s what happens. Example:. A commercial lender does not convey legal title. The only thing that the mortgagor has is an equitable interest in the property. When the mortgagors fulfill their contractual obligation they get the deed, that’s what would ideally happen in this situation. If there is a breach of contract, the lender’s sole remedy is to foreclose. The lender forecloses to protect their security (in this case the owner’s security is the property) and the lender forecloses to extinguish the mortgagor’s equitable interest in the property which clouds the title of the property-and so must the owner of record in this instance. To carry this one step further. The lender may see that the property is abandoned. Why don’t they just put in on the market and sell it for what’s owed them without foreclosing??? Because- the equitable interest clouds title. The owner in this case could do the same thing. But, the purchaser a couple of years later may become smarter and sue for their equitable interest and other damages.
.
The only LEGAL way to extinguish an equitable Interest is via foreclosure. Hence, a Lis Pendens not an ejectment action. What you are suggesting is nothing more than a variation of a contract for deed or an installment sale.. The courts would view this,from a substance over form perspective. If it walks,quacks,and waddles like a duck. call it what you will , it’s a duck. This is a sale, the purchaser has equitable interest. If this goes to court that’s the way it will be viewed. Again, I say the only legal way to get good title back is to foreclose.
““In addition, I don't know how you're coming up with triple damages and usury.””
If this is seller financing, and there are usury laws in your state. The penalty for Usury is generally treble damages. An attorney can have the amount financed analyzed and determine the interest rate charged by the owner based on their monthly payments.. If that amount compared to the amount of a payment at the Usury threshold is exceeded –enter the Usury premise. What does it hurt to attempt to enrich the client and the attorney??. Wannice said, I believe, that she has a $400/mo positive cash flow that should be examined by the lawyer.
In any case this question is moot.
WANNICE
I’m sorry that this happened to you. You’re much wiser now. As I said before, if they don’t have the funds up front the best bet is to look
for someone else. I hesitate to tell you that, if the prospect has the earning capacity to make the option consideration payment- but needs 2-3 months to get the cash together, I have let them sign a short term lease. But, it’s just a lease. When they come up with the cash then we enter into a lease option agreement. If they don’t come up with the cash then they have to leave, voluntarily or not. That’s a judgment call which I have to make. Best of Luck!
WHOA there, sammyvegas!
I don't know how or why you made your leaps concerning my prior posts, but apparently you totally misunderstood what I was saying.
I suggested to Wannice in the beginning that in the future, she might consider not giving anyone a lease with option to buy any of her properties. Rather she should structure the deal in the future as a purchase. Buyer would have right to occupy property prior to closing via a lease which would be attached to and incorporated by reference in the purchase contract.
I suggested this to her for the future because an owner's best interests are protected far better with this type of deal structure than the lease option route. Owner don't tie up their properties by renting to some person and giving that person a purchase option. Also, if the buyer defaults under the purchase contract or lease, the purchase contract is automatically terminated. Thus, buyer has no equitable interest in the property because the purchase contract is DEAD.
I did NOT suggest that this be structured as a contract for deed. I suggested straight sale with longer than usual settlement date. I did NOT suggest that this be structured as a seller-financed deal.
Hence, all that stuff about usury, foreclosure, lien theory, etc. is irrelevant to the type of deal I was suggesting she use in future scenarios since I know that Wannice has already given these people a lease with a purchase option.
Consider sending this registered mail and Priority with proof of mailing an delivery confirmation:
PAYMENT DEMAND:
Notice is hereby given that an option consideration payment in the amount of $____(Full original amount) remains unpaid. This good-faith constructive notice is given to ________(John Doe et el) concerning the property commonly known as ___________.
Take notice that the option given in good faith under the promise of receiving $---------- (Full original amount) remains unpaid. The option is hereby terminated effective (todays date). As a show of good faith the Grantor of this option will reinstate this option, if the original option consideration amount plus $100 is paid in full by__/__/__( two-weeks? A month?)
Full credit will be given for any previous partial payments
You send this CONSTRUCTIVE NOTICE to the people you in "good faith" gave an option to.
Note:This whole deal could blow up in your face if you offend these people. (They'll stop paying rent, forcing you to evict them and having the place to cleanup and re- lease/option)
Getting a new lease-option tenant isn't so bad. You get another option consideration payment (Non-refundable and IN FULL)
You could also file in small claims court for judgement for balance due under the option. I'd wait until they were out of the property before I did this. It WILL get them mad.
[ Edited by bigideas on Date 02/05/2004 ]
Hey guys,
I fully understood all the replys to my original post and feel certain that there is middle ground, be it extended closing (very creative) or just doing the due diligence a step further and pre-qualify all the prospects before selection. This was a house that I was a bit too anxious to turn and reduce holding costs; I certainly learned quite a bit. I made sure that the promissary note indicated that there would be NO OPTION to purchase said property until the note was satisfied at which point we would negotiate the option seperate and aside from the lease. What I did not do is break the lease with non-payment of the note and indicated a provision for month to month terms. That would have covered me. Hey I got my lease payment this month but I am poised for the day it is late.
Quote:
On 2004-02-05 14:33, bigideas wrote:
Consider sending this registered mail and Priority with proof of mailing an delivery confirmation:
PAYMENT DEMAND:
Notice is hereby given that an option consideration payment in the amount of $____(Full original amount) remains unpaid. This good-faith constructive notice is given to ________(John Doe et el) concerning the property commonly known as ___________.
Take notice that the option given in good faith under the promise of receiving $---------- (Full original amount) remains unpaid. The option is hereby terminated effective (todays date). As a show of good faith the Grantor of this option will reinstate this option, if the original option consideration amount plus $100 is paid in full by__/__/__( two-weeks? A month?)
Full credit will be given for any previous partial payments
You send this CONSTRUCTIVE NOTICE to the people you in "good faith" gave an option to.
Note:This whole deal could blow up in your face if you offend these people. (They'll stop paying rent, forcing you to evict them and having the place to cleanup and re- lease/option)
Getting a new lease-option tenant isn't so bad. You get another option consideration payment (Non-refundable and IN FULL)
You could also file in small claims court for judgement for balance due under the option. I'd wait until they were out of the property before I did this. It WILL get them mad.
<font size=-1>[ Edited by bigideas on Date 02/05/2004 ]</font>
I like this thought bigIdea and I may use something similar to keep a paper trail in case of court action. I send everytihng via FedEx and keep PODs for the record. But hey, let's look at the bright side. TAX time, people will have option money and that's why it's a good idea ot be pushing the marketing effort right now. . . later.
mac
Interesting exchange between Nancy in PA and Sammy(LV). Lots of good thinking on both sides. I think that I agree with Sammy overall. Here's why:
1) The option "ties up" my property for the lesser of the option term or the tenants compliance with its terms and the terms of the lease. I have control over the former, the tenant over the latter.
By entering into a lease-purchase, my property is tied up for the lesser of the period ending with the closing date or the tenants compliance with its terms and the terms of the lease. I have control over the former, the tenant over the latter.
Either way, I can control the amount of time for which the property is "tied up". And having it "tied up" with a paying tenant is not a bad thing, in my view.
I do think that a purchase gives the tenant a better "equitable interest" argument than an option, meaning that a court is more likely to rule that the tenant has built "equity" in "their" property. If the court holds that the tenant has an equitable interest in the property, then I have to foreclose to get rid of them instead of evicting. The former is MUCH harder than the latter.
Also, the tax consequences of an option are favorable to me. I needn't pay taxes on the option consideration until expiry, exercise or default. The tax consequences of a lease purchase are less clear...it could be a lease followed by a purchase OR (ala the "equiable interest" argument) could be treated as a purchase from the get-go (read: pay taxes NOW) by the IRS.
On point one, lease option and lease purchase are the same. On points 2 & 3, option beats purchase.
Now , if you have a very committed buyer who wants more ownership now, land contract or contract for deed may be the way to go. Those arrangements CAN attract better buyers than would a L/O and the better buyer may bring enough to the table to make the consequences of LC/CFD worthwhile (definite equitable interest, definite sale for tax purposes). In some states where LC/CFD laws are not very investor friendly, lease purchase may be a better alternative.
Just my two cents,
John Hyre, Tax Attorney, Accountant, Investor
JohnHyre,
Thanks for your comments.
What I had suggested to Wannice for future situations (not this one) wasn't a purchase option, wasn't a lease purchase, and wasn't a contract for deed.
What I suggested was a straight purchase contract that provided for buyer to occupy the premises pre-closing (call it a U&O agreement), with closing taking place at whatever date in the future, essentially "normal" purchase contract with an extended settlement date and other appropriate changes. Attached to the purchase contract and incorporated by reference would be the U&O agreement. Seller's remedies in the event of any default would be laid out in the agreements, including right to possession.
It is my non-lawyer experience that in the above scenario, at least in PA, that if the buyer occupant defaults under the purchase contract or under the U&O (and therefore a default under the purchase contract since the U&O by incorporation is part of the purchase contract), the default terminates the purchase contract. No equitable ownership interest if you have a dead purchase contract.
I have advised seller clients not to get involved with people who want to rent the property now and maybe buy it down the road because I feel that giving a purchase option to a tenant ties the seller's hands. The seller cannot sell to a real buyer until the option period expires. Thus, they may miss out on selling to real buyers. If the owner wants to sell, deal with buyers. If the owner wants to lease, deal with tenants.