Breaking A Lease-Option Contract? Some Considerations For Landlords

A recent Q&A columnn at Bankrate.com notes some considerations for landlords seeking to terminate a lease-option arrangement with a tenant:

• [T]here could be serious complications to breaking a lease-option before the tenant's option term expires. If the renters/buyers had the foresight to file a Memorandum of Agreement with the county clerk, indicating the tenants have an interest in the property, it may place a cloud -- though not a lien -- on your home's title. Further down the line, a prospective buyer may see this notation and demand the matter be resolved before moving forward with a sale.

• Some lease-option tenants will fight eviction and claim in court they have an "equitable interest" in the property. The more "equity" the tenant has amassed, the more likely it is a judge will rule the arrangement an equitable mortgage, forcing you to go the foreclosure route. In some cases, the IRS has identified lease-option payments as installment-sale payments and made the original owner pay tax and penalties on them.

• You didn't say whether the renters/buyers have lived up to their end of the agreement. If the tenant has stopped paying rent but the total option money you received thus far exceeds 5 percent of the agreed-upon purchase price, you may indeed be required to go through the foreclosure process.

For more, see Breaking a lease-option contract.

Editorial Note:

Any tenant entering into a real estate transaction involving a lease with an option to buy, lease-purchase, or other similar type of "deferred conveyance" home purchase would be well advised to go down to the local county government office where deeds and mortgages are recorded and record a memorandum of agreement showing the tenant's interest in the property.

Further, a prospective tenant may also want to make sure that the landlord holding him/herself out as the property owner is, in fact, the current title holder of the home.

If the prospective tenant has to ante up a significant cash deposit, it may be a good protective measure to obtain a title search of the subject property and possibly even a title insurance policy insuring the leasehold interest being acquired by the tenant, making sure the landlord is the true owner, and is not in foreclosure or is otherwise setting up the tenant for a rent skimming scam (where the landlord pockets the rent, fails to make the mortgage payments, and allows the home to go into foreclosure; for posts where tenants entering into these types of rent to own arrangements have gotten screwed over by the landlord, go here).

Finally, as noted in the article, if a landlord tries to terminate the lease-option early against the tenant's wishes (or if the tenant otherwise thinks he/she is getting screwed over by the landlord - like in a foreclosure rescue scam), the tenant might be able assert an equitable mortgage claim in court. If a judge agrees that an equitable mortgage claim is valid, the landlord will be unable to oust the tenant through eviction proceedings, but rather, will have to initiate a foreclosure action, treating the tenant as the actual owner and the landlord as a mortgage lender.

(For those looking to begin research on the case law on equitable mortgages and don't know where to start, try here, and then scroll down and click any of the "equitable mortgage posts by state" links in the sidebar on the left side of the page).