Monday, February 9, 2009

Lease - Purchase Agreements For Residential Property

The lease-purchase agreement creates a relationship between a landlord and tenant, whereby the tenant typically rents the property for a specific period of time, and subsequently, purchases the property outright. This situation is advantageous to both parties. The tenant, often a first time homebuyer, is able to establish a payment history that is important to prospective lenders while buying himself/herself additional time to save money for the down payment and closing costs. The landlord is able to secure a buyer without having to market the property through a real estate agent, thereby retaining more of the profit on the transaction.

It is important for both parties to memorialize the lease-purchase transaction in writing so that all of the terms are clearly established. Below, you will find some of the key terms as well as sample language that are often used in a lease-purchase agreement. Remember, that you should not rely on the language below as legal advice. This is for demonstration purposes only. Always consult a real estate attorney before entering into a real estate transaction.

The Leasing Provisions of the Lease-Purchase Agreement:

1. Lease- The lease-purchase agreement needs to state first and foremost the leasing component of the transaction. Example: "Seller hereby demises and leases to Purchaser and Purchaser hereby takes and rents from Seller that certain real property located in ____________County, ____________, being more particularly described on Exhibit "A" attached hereto and incorporated herein by reference."

2. Term- As in any lease, the start date and end date of the lease must be specified. Example: "The initial term of the Lease shall begin on the _____day of _______, 2008 and shall terminate on the _____day of _______ 2008".

3. Rent- The amount should be clearly set forth as well as the due date for rent each month. Example: During the term of the Lease, Purchaser shall pay unto Seller the sum of ______________($_______________) per month as rent for the Property. The monthly rental shall be due on the _______ day of the month and if not paid by the ______ day, there shall be a late charge of $_________ due for such month".

Of course, as in any lease, you want to include provisions dealing with utilities, taxes, permissible/non permissible alterations to the property, assignment and subletting, nuisances, entry and inspection by landlord, and any necessary disclosures such as lead-based paint and mold.

The Purchase Provisions of the Lease-Purchase Agreement:

1. Agreement to Purchase Real Estate - Lease-Purchase Agreements can be mandatory or non-mandatory. The language should reflect whether the tenant must buy the property at the conclusion of the lease-term, and what penalties the tenant will face if he/she defaults and fails to close the transaction. Example of mandatory purchase language: "Seller agrees to sell and Purchaser agrees to purchase on the terms and conditions set forth herein that certain of real property located in ________ County, _______________________, being more particularly described on Exhibit "A" attached hereto and incorporated herein by reference, together with all improvements now situated thereon. The Closing Date of the purchase shall be on or before _________________, 2008. The parties acknowledge that time is of the essence in completing and closing the purchase transaction".

2. Earnest Money- As in any residential purchase agreement, the lease-purchase agreement should include language that requires an earnest money deposit from the tenant. A landlord may obtain more than just the earnest money deposit as damages if the agreement is worded to provide for additional damages. Example: "In conjunction with the execution of this Agreement, Purchaser has delivered to Seller earnest money in the amount of _____________ ($___________) to secure and guarantee Purchaser's duties and obligations hereunder. In the event Purchaser shall default in any of its duties or obligations hereunder, Seller shall be entitled to said earnest money as liquidated damages. Liquidated damages are not deemed full satisfaction of all claims for damages and injuries, and Seller may maintain any and all actions permitted under the laws of the State of __________, including, but not limited to, injunctions, specific performance and actions for damages."

3. Purchase Price- The purchase price must be set forth in the agreement. Also, the language typically states that the tenant's lease payments are credited toward the purchase price of the property. Example: "Purchaser agrees to pay Seller and Seller agrees to accept as total consideration for the purchase and sale of said property the total sum of ________________($_____________), plus interest at the rate of ______ percent (_______%) per annum from and after the date of this Agreement (the "Purchase Price"). Purchaser shall be entitled to deduct from the Purchase Price the earnest money paid pursuant to Section ______ hereof and all rents paid pursuant to Section ______ hereof, with all such amounts to be applied first to accrued interest and then to principal."

As in most agreements of sale, you also want to include provisions that address title, closing costs, taxes, inspection, default, condemnation, and disclosures.

Joshua M. Marks, Esq., Marks & Rosenzweig, LLC,,

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