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The Length of the Option Term/Period
You need to give your tenant time to repair her credit and obtain financing. That takes 12 months or longer in most cases. On the other hand, you do not want to keep your property off the market for two years or longer. A longer option period suggests that the tenant is buying the property over time. Again, a lease-option looks more like a land contract, if the option period is very long. I prefer an option period of 12 to 18 months. If you want to renew the option period after 18 months, then negotiate an extension, sign new agreements, and collect another option fee.
No Public Notice of the Option
The holder of an option to purchase real estate does not own an interest in the property itself, but merely holds a contract right to force the seller to convey the property to the holder of the option according to the terms set forth in the option. That is the fundamental difference between a lease-option and a land contract. Thus, the option should never be recorded and, if the tenant/buyer defaults on the lease, the option should not be discussed in the eviction or damages proceedings. The option shall expressly state that it may not be recorded.
Close the Sale as Soon as Possible
A potentially dangerous time for the landlord arises after the tenant has delivered notice of exercising the option and before the closing. This is because the tenant acquires an interest in the property by exercising the option but is supposed to continue paying rent until the closing. Any default under the lease at this time may not be sufficient to terminate the option rights unless the documentation of the transaction is clear. The last thing the landlord wants is to be forced into a superior or circuit court, as opposed to a small claims court, to foreclose or forfeit a tenant who has paid only the option fees, is no longer paying any rent, and is unwilling or unable to close on the purchase. One possible solution to this problem is to include language in the option indicating that the option cannot be exercised or is voided automatically in the event of any default under the lease.
Notice of Default & Termination of Option
When the tenant breaches the lease, the landlord has the right to terminate the option. That is done by the landlord sending notice to the tenant that the landlord has terminated the option. Most landlords fail to do send notice, creating an issue to debate before a judge later. One of my old law partners has a saying that rings true every time I file a lawsuit. He says: “As soon as a client must file a lawsuit, the client has lost.” Lawsuits are a waste of time, money, effort, energy, opportunity, etc. One key to making money in business is to make every deal a success. Win-Win scenarios are always better than win-lose relationships. Another related key to business success is to avoid expensive disputes.
Applying those principles to lease-options, it is important that the landlord document his intentions as to an option agreement whenever a tenant breaches a lease. If a tenant is a few days late on rent, that is a breach, and the landlord should send a letter to the tenant indicating that the landlord has terminated the option, or is willing to waive the default as to the option that time. If the lease or option agreement requires a written notice from the landlord to the tenant in order to terminate either the lease or the option, then the landlord must make sure to follow the requirements of the written agreements. So many landlords fail to follow their own agreements. Yet, it is so very easy to send a letter or other written notice to the tenant and avoid any problems in the process.