Can I Break Tenant's Lease-Purchase Contract?
Dear Real Estate Adviser,
I have a lease-to-own agreement with my tenant. Now a different person is serious about buying my house. Can I sell it?
This is a delicate one. Based on the structure of most lease-purchase deals, you've probably contractually agreed to sell your home to your renter at a set price after two to five years. Meanwhile, you're likely charging your tenant a premium of around 5 percent above the normal rent (often called a "consideration fee" or "option fee") that accrues to form a down payment, and you've probably also agreed to credit a set percentage of the rent for equity in the renter's purchase.
If your tenant is set to "perform" as agreed, you're probably contractually bound to honor that accord.
Looking for ways to break your contract
So is there a compelling reason this arrangement should be broken? Some owners such as you, with an outside buyer looming, will scour the lease agreement for violations such as late payments, failure to maintain the property, neighborhood nuisance, etc., in hopes of voiding it. But this can backfire. If you try to exaggerate the rationale for nixing the deal, the tenant could take you to court to sue for any accumulated equity and down payment money, as well as the cost of any improvements he or she made (and you approved) in anticipation of owning.
Moreover, it's not unusual in such cases for a court to rule that the landlord/seller must treat the tenant as a homeowner and initiate foreclosure proceedings instead of a renter eviction. That could be time-consuming and the tenant could cease payments altogether or trash the place in the interim. With improvements in home values, lease-purchase sellers are discovering they can often get more money for their home than the amount their lease-purchase tenant agreed to buy it for.
Don't assume, though
First, though, are you sure the tenant still wants to buy or is able to buy? Lease-to-own agreements typically don't obligate tenants to purchase; they simply give them that option, and most buyers who enter into these arrangements are banking on fixing their credit to qualify for a mortgage. Most -- perhaps up to two-thirds -- can't proceed for various reasons at option's end. Without tipping your hand about your buyer-in-wait, it may be prudent to just ask the renter about his or her intent or ability to proceed.
First, let's hire all the lawyers
I hate to beat that "hire an attorney" drum, but if you believe you have legitimate grounds to void the contract and the tenant differs with you, you'll likely need legal representation. Various localities and states have different wrinkles in their landlord-tenant laws that may not make voiding so easy to do. If your renter was smart enough to file a Memorandum of Agreement with the county showing an equitable interest in your property, that may place a cloud on the title and make the home a tougher sell until the issue is resolved.
Or work out a deal instead of breaking one
In the end, it may be less costly to just work out an amicable deal for partial or full reimbursement of consideration fees and any other payments or improvement above regular rent rate if the otherwise complying tenant will agree to end the agreement so you can sell the house. This too will require some legal finesse and yet another contract, so I don't recommend a do-it-yourself approach. Otherwise, you may be stuck riding out the length of the lease option.
Ask the adviser
To ask a question of the Real Estate Adviser, go to the "Ask the Experts" page and select "Buying, selling a home" as the topic. Read more Real Estate Adviser columns and more stories about real estate.
Copyright 2014, Bankrate Inc.