Q-I am a landlord renting a house to a tenant. He wants to be able to have the option to buy the house during the term of the lease. We have agreed on a price, but I am unsure how we should arrange for the option in the lease. I know that nothing within the printed lease form deals with sale of the property. How should the option be set up in the lease?
A-There are more terms to be decided before you can properly draft option language within the lease. This can be a complicated process, requiring a properly-drawn lease rider-or lease amendment, if you already signed the lease.
Because there is more to acquiring a parcel of real estate than simply paying a certain price, you might want to have a contract to purchase the house attached to the lease as a rider. In that way, both you and the tenant will have the full agreement of the terms for purchase. Since you will have to draft a contract for the sale sooner or later, by doing it now each of you will know what is expected when the time arrives to exercise the purchase option.
You must have fairly specific language concerning how to exercise the option. Usually, the tenant must give the landlord sufficient notice to prepare for the ownership transfer. The time span for the notice also is important if the tenant must obtain financing in order to complete the purchase. You might want a provision stating that the tenant is obligated to complete the purchase under the option only if he can get the necessary financing.
Often, the landlord and tenant will agree that a certain amount of the rent will be applied toward the purchase as a down payment. If the tenant doesn’t buy the property, the landlord gets to keep that set-aside portion of the rent.
If you and the tenant are fairly certain that he will exercise the purchase option, you might agree to help him accumulate the down payment over time by increasing the set-aside.
If you are going to provide for a portion of the rent to be applied to the purchase, it is important that you also have a provision stating that if the tenant defaults under the lease, or under the contract to purchase, all the money paid in will be considered rent and none will be returned to the tenant.
The documentation can be tricky and a mistake on your part can be costly. You probably should not attempt to prepare the needed documents without first consulting an attorney.
