Pros and Cons of Lease Options

By Robert Griswold

Question: Our tenant has a lease-to-own option on his rental agreement. To date, he has not paid the rent on time, and has neglected to include the agreed upon late fee. What does the law say about our options to declare him in default of the lease, and the lease-to-own option, and retake possession of the property? We have sent him a bill for the late fees due, certified mail, but he has not yet responded.

Landlords' attorney Smith replies:

The landlord's perspective on options is that they are not a good idea. Lease options benefit only the tenant - not the landlord. I do not recommend lease options to my landlord clients. Instead, I encourage them to make a choice: sell the property or lease the property, but not both at the tenant's choice. Arguably, the tenant is stalling because he can't make up his mind or qualify for the loan, or both. Carefully analyze the tax aspects.

Further, I want you to take a careful look at your option and default clauses in the lease. If the lease provides that the option can be extended provided the tenant is not in default, then there exists no rent to purchase when the rent is due and unpaid. But, without this type of clause, the option may still be exercised with proper notice, as per the terms of that provision. Even though there are late charges and other expenses owing, the option can be exercised unless the lease is declared forfeited by an unlawful detainer action. Once evicted and the lease forfeited, under ordinary circumstances, the tenant will have no right to exercise the option.

Tenants' attorney Kellman replies:

I agree with Ted that these lease/option to purchase contracts are not a very good idea, but I disagree with Ted in that I feel these contracts benefit landlords and not tenants. In fact, these contracts can easily cause tenants to lose a lot of money. This happens when the tenant pays an extra non-refundable option fee or additional monthly payment towards the down payment. If the lease is somehow terminated (e.g. by offering to pay the rent a bit too late), the tenant may lose all that extra money paid over and above the rent. Thus, a landlord may keep some of the purchase price paid by the tenant and keep the home too. Not a bad deal for the landlord but awful for the tenant.

In your case, you should not have much trouble in declaring the lease forfeited. All you need to do is proceed with legal action regarding the non-payment of rent. Most lease/option contracts will provide that the option to purchase is lost if there is a default of a material obligation in the lease which, of course, includes paying the rent. If the rent is not paid within the time allowed by law, the lease can be declared forfeited which may result in the eviction of the tenants and will most likely terminate any option to purchase the property. Of course, any additional option money paid to you should be handled as per the contract. Landlords and tenants should have any such lease/option contract reviewed by an attorney before they sign.

Copyright 2003-2006 Inman News Features

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