What Is a Lease Purchase Agreement?
A lease-purchase agreement is a home rental lease agreement that includes a lease-purchase option for the party renting the house to purchase it during the term of the lease agreement. During the existence of such an agreement, the person renting the house has the exclusive right to purchase the house, and it cannot be sold to any other party. The lease part of the agreement generally lasts for a period of one to three years, and the lessee can exercise the right to purchase the house at any time during this period. There can also be a variation of the agreement where the lessee is contractually obligated to buy the house at the end of the term of the agreement.
The lessee pays a deposit at the time of agreeing. This deposit may, in some cases, be treated as a part of the down payment towards the house. The agreement also lays down what the purchase price of the house shall be. The parties may agree to lock down the sale price according to the market price at the time of agreeing.
These agreements are also called ‘lease to own agreements‘ or ‘lease with an option to buy’ in the field of real estate.
People Involved in a Lease Purchase Agreement
The people involved in a lease-purchase agreement are the party who is renting his home (known as the seller or lessor) and the person who is renting such home (known as the buyer or lessee).
Purpose of a Lease Purchase Agreement
The purpose of a lease purchase agreement is to help a person who wants to buy a home but does not have enough money for a down payment. There may be instances where a person cannot take a loan for any reason whatsoever or does not qualify for a mortgage. This agreement helps such people have the option of purchasing a particular property through a somewhat long process. These homes purchased through this process are known as lease purchase homes. Through this agreement, every rent amount paid by the lessee will be credited towards the purchase of the house. However, if the lessee does not exercise the lease-purchase option, the money is forfeited and will be kept by the owner.
There is also another form of a lease purchase agreement where there is a stipulation that the lessee must purchase the property at the end of the lease term. If the lessee fails to purchase it at such a time, the owner may sue him for damages and may institute a case against him.
This agreement also helps the owner of the house to get a good price for his house in a tough market. The rent of houses in such agreements is usually more than the average rent for such houses which can prove beneficial to the owner. There may also be certain properties that the owners find difficult to rent. In such circumstances, this arrangement of a lease-purchase option may be an advantage to the owner.
Contents of a Lease Purchase Agreement
A lease-purchase contract has all the usual inclusions of a standard lease agreement along with the following important clauses:
- Option fee: This fee is usually paid as a deposit by the lessee for the option to purchase the house. This amount may be credited towards the down payment.
- Additional rent: Most lease-purchase agreements charge a lease that is higher than the usual rent. The agreement must specify what such additional rent will be used for. Such amount may also be added towards the down payment. In some agreements, there is a stipulation that an escrow account must be created to ensure the security of such additional rent.
- Duration of the lease: The period for which the parties are entering into this contract must be mentioned clearly in the agreement. Such agreements are usually valid for a period of two to three years or more.
- Sale price: The agreement must lay down the purchase price of the house. It can be the price at the time of entering into the agreement or the price when the actual purchase takes place. In many agreements, the parties agree to lock the sale price of the house at the price it is when the agreement is created. The changes in the market do not affect the sale price that has been locked.
- Terms and rules of the lease: This clause talks about the various details about the house, such as which party will be liable to pay the property tax, which party will be responsible for repairing and maintaining the house, etc. The liability for such maintenance and payment of taxes is usually on the lessee.
- Termination: This clause is essential as it talks about the consequences of violations of the agreement and how each party can terminate the agreement.
How to Draft a Lease Purchase Agreement
The following are the steps to follow while drafting a lease-purchase agreement:
- Both parties must negotiate and decide the important details such as the purchase price of the house, the rent amount and the additional rent, etc.
- The details such as whether an escrow account should be created for the additional rent and how the security deposit will be dealt with must be discussed to avoid any misunderstandings.
- All the clauses must be well-drafted, and the provisions must be spelled out well to avoid any confusion in the future. The agreement should be equally balanced between the parties, and the scope for any possible dispute in the future should be reduced as much as possible.
- The agreement must be reviewed thoroughly by both parties to ensure that their rights are protected under it.
- Both the parties should sign the agreement, and they should keep a copy of the agreement with themselves.
- The basic negotiation strategy is to ensure that the agreement is fair to both parties and that their interests are protected.
- It must be negotiated such that the agreement is fair and balanced and benefits both parties.
Benefits and Drawbacks of a Lease Purchase Agreement
The following are the benefits and drawbacks of having a lease-purchase contract:
- The agreement allows a person who does not have adequate finances to purchase a house, to exercise the option to buy the house he was renting within a certain specified period. This is a major advantage for a person who does not have access to financing or who does not qualify for a loan or a mortgage. Such persons usually get around two to three years to exercise the option of purchasing the house that they are renting.
- If the value of the house goes up during the period of the agreement, this increase in value goes to the buyer, and hence the equity of the property will build even before the purchase. At the same time, if the value of the property falls, the buyer will have to purchase the property at the agreed price. Hence, negotiating the clause for the sale price can be a little tricky.
- It is a good chance for the owner of the property to generate income from his property. As the rent is higher than usual, it is beneficial to the owner.
- A disadvantage of the agreement is that the owner will be bound to sell the house at the value at the time of agreeing if that is agreed upon. If the market value of the house goes up, it will be a loss for the owner.
What Happens When You Violate a Lease Purchase Agreement
If the lessee violates the clauses of the lease-purchase agreement, he may lose his option to purchase the house. The owner will forfeit the option fee and the additional rent that has been paid by the lessee. If the lessee fails to make the rental payment or breaches any other contractual obligation, the seller has the option of evicting him(1) as under a regular lease agreement.
If the agreement is such that the lessee is contractually obligated to purchase the house at the end of the lease term, he cannot go back on such an obligation. If he does go back, the seller can sue him, and in all probability, the seller will win the case.
In many circumstances, the agreement shall include a clause to detail the consequences of the breach of the provisions of the agreement. The courts can also remedy violations of the agreement(2) by awarding of monetary damages to the other party.
In conclusion, the lease purchase agreement is an important one as it gives a person the option to purchase a house that he is renting over a period. It can be a good option for a person who wishes to pay for a house over a period of time, but he does not have proper access to financing. He can enter into this agreement that gives him the flexibility of exercising the purchase option at any time during the term of the lease. However, if he fails to purchase the property at the end of the lease term, he will lose the additional rent that he has paid and also the option fee or down payment paid by him, if any.