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I thought we would discuss the “rent-to-own” lease agreement today. We are often asked to draft or review such agreements and I think it’s imperative to shed light on some of the key provisions and considerations of the contract.
What is a Rent-to-Own Option?
A rent-to-own lease agreement or contract gives the landlord and tenant the flexibility to structure a purchase option in the event that the tenant eventually wants to buy the property. In this agreement, the tenant has the ability to purchase the unit being leased if he or she meets the requirements listed. This is often called a “rent-to-own” provision or “purchase option.”
You can choose to make this purchase option contingent upon the tenant first occupying the unit for a certain number of months. You can also choose whether all or a portion of each rental payment will be credited toward the eventual purchase of the property. Finally, you have the option of charging an upfront, nonrefundable fee in return for giving the tenant the purchase option.
The tenant will never be entitled to a refund of any payments credited toward the purchase price. However, if the landlord is unable to convey good and marketable title when the tenant exercises the purchase option, then the landlord must refund the initial fee paid for the purchase option.
After exercising the purchase option, the tenant must make payments on time and in full for the payments to be credited toward the purchase of the premises. The tenant must also remain an occupant for the minimum number of months specified in the agreement in order to be able to exercise the purchase option. This helps ensure that the tenant makes regular payments and makes the cash flow more predictable for the landlord.
When the agreement starts, interest will immediately begin accruing on the unpaid principal balance of the purchase price at the rate you choose, and rental payments will be credited against the unpaid principal balance as interest continues to accumulate. In addition, any unpaid obligation under the terms of the agreement still due to the landlord at closing will be added to the principal balance of the purchase price. Finally, the landlord also has the right to sell the property to another party at any time; however, the new buyer must honor all of the terms of the agreement.
A rent-to-own agreement creates a fixed-term tenancy. This is simply a tenancy agreement that states that it will end upon a specific date in the future, usually about six months or a year from the start of the tenancy. A periodic tenancy, on the other hand, has no set end date and usually continues from month to month until one of the parties chooses to terminate the tenancy.
For fixed-term tenancies, the agreement will automatically expire at the end of the term. If the tenant holds over by staying on the premises and the landlord does not notify the tenant to vacate the unit when the agreement ends, then the agreement will convert to a periodic tenancy and continue on a month-to-month basis until terminated.
A monthly payment structure is most common. However, you may also choose for rent to be paid weekly, twice per month, every two months, every six months, or once per year. When specifying the location where the tenant must make payments, you may add multiple locations as a convenience to the tenant. You may allow the tenant to pay via check, cash, direct deposit, wire transfer, credit card/debit card, money order, cashier’s check, online, or all of the above. You may also add custom payment methods.
Signing incentives are great ways to motivate potential tenants to agree to longer-term leases or higher rental payments. You may add the details of any signing incentive you have agreed upon. Signing incentives include rent concessions or other extra benefits that are not standardly included for your tenants.
In the absence of a security deposit, tenants are still required to pay for any damage they cause to the property. However, it is recommended that the landlord always require tenants to pay an upfront security deposit. This will help ensure that the tenant pays for any damage discovered by the landlord at the end of the tenancy and helps avoid costly litigation that would be required to enforce the agreement in court.
The landlord may use the security deposit to repair any damage the tenant causes beyond normal wear and tear to the premises, the common areas, and any furnishings provided by the landlord. “Normal wear and tear” means deterioration that occurs when the premises, or any furnishings provided, are used as intended, without negligence or abuse by the tenant or any of the tenant’s guests or subtenants (if permitted).
The parties may agree that the tenant may break the agreement by presenting the landlord with substitute tenants. This allows the current tenants to be released from the agreement. The landlord may refuse to accept any substitute tenants if the landlord has reasonable grounds for the refusal. The landlord may also negotiate a new agreement on any terms desired.
I built my law practice on the premise of being a life raft in a sea of sharks. I want to be an advocate for those that have been wronged and are too intimidated to seek help. My firm is here to explore your options, guide you through your legal journey, and give you that safe space to ask questions! There’s no such thing as a stupid question…Only the ones you don’t ask. So, my question to my clients is not “do you have any questions?” But rather “what questions do you have?”
As always, the Kazi Law Firm is standing by to help you in your time of need. Don’t hesitate to contact us today. We specialize in real estate law, landlord-tenant disputes, immigration, and wills & estate planning. Family is at the core of our practice. Just as we treat our family with respect and understanding, we treat yours. Come join the Kazi Law Firm family today!
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