Lease Options vs Lease Purchase

The rising popularity of serviced apartments attracts guests seeking hotel-like comforts while maintaining their privacy. To stand out among the competition and increase profitability, it’s crucial to enhance your marketing strategies for your multiple properties in town.

Lease Option and Lease Purchase Agreements, often termed as “Lease-to-Own” Agreements, are often confused, despite their significant differences. These contracts enable potential buyers to inhabit the seller’s property temporarily before finalizing the sale. This arrangement can aid both parties in achieving their transactional objectives and meeting specific circumstances. In some cases, these agreements might even enable buyers to accumulate a portion of the property’s value over time.

It’s crucial to discern the disparity between a Lease Option Agreement (“Lease Option”) and a Lease Purchase Agreement (“Lease Purchase”).

Lease Purchase

A Lease Purchase arrangement encompasses two distinct contracts:

The residential lease, outlining the tenant-buyer’s occupation of the property for a designated period.
The sales contract, binding both parties to standard terms akin to a residential purchase agreement once the specified lease term concludes.

These agreements usually incorporate cross-default provisions, ensuring that a breach of one agreement triggers an automatic breach of the other. Given that the tenant-buyer commits to property purchase within a Lease Purchase, the lease often designates them responsible for maintenance and repairs, typically the landlord’s duty.

Lease Option

A Lease Option functions in a manner akin to a Lease Purchase, involving two agreements and allowing the tenant a potential property purchase. However, unlike the Lease Purchase, the tenant does not commit to a sales contract; instead, they enter an option agreement, termed the “Option Agreement.”

Within this Option Agreement, the tenant-option holder gains the right to acquire the property at a pre-agreed price during the lease term or stipulated period called the “Option Period.” For this privilege, they pay a fee known as the “Option Fee,” akin to a deposit on a sales contract.

This similarity often leads to confusion between Lease Option and Lease Purchase. Cross-default provisions are present in both, and the non-refundable nature of the Option Fee further aligns them. When the tenant-option holder elects to exercise their purchase option, the Option Fee generally offsets the purchase price. However, upon executing the sales contract, an additional deposit might be required.

Crucially, the Lease Option diverges by not obligating the tenant to buy the property, but binding the seller to sell it if the tenant duly exercises the purchase option.

What to consider before a lease agreement:

To prevent potential claims of equitable interest, sellers must consider specific factors when crafting a Lease Purchase or Lease Option:

Ensure the Lease Purchase or Lease Option structure does not mimic a contract for deed;
Limit the lease term to a year or less;
Implement a security deposit (typically for landlords, not sellers);
Maintain responsibility for property taxes and insurance;
Avoid granting substantial rent credits (risking increased tenant equity claim);
Omit terms like “credit,” “seller,” and “buyer” in the Lease Option’s lease or option agreement section;
Assess tenant-buyer/option holder’s intended property improvements and their value;
Compare the tenant-buyer/option holder’s option price to the property’s fair market value. A smaller disparity implies higher potential equity claim.

For queries about Lease Purchase, Lease Option, or real estate dealings, kindly reach out to us.