Lease options, partners and lawsuits - Posted by Rob


#1

Posted by JPiper on October 23, 1998 at 11:44:43:

Sounds like you?ve got a variety of issues running through your mind, and I?m at a disadvantage because I can?t see your paperwork. But here?s a few thoughts.

First, an option to buy real estate is clearly an interest in the real estate. Secondly, if you used Bronchick?s form for a buyer the chances are high that you have equitable title, an interest in real estate. In fact, in many states to remove an equitable interest in property could require the filing of a quit claim deed. The terms ?owner-broker? is required to disclose an ownership interest to ?protect? the public. Whether stating ?owner-broker? as a license disclosure requirement somehow requires a certain type of ownership interest is an interesting question?..one which I suspect no one can answer for you, perhaps not even an attorney, and particularly not your tenant buyer?s attorney.

I think a more important matter is the heightened requirement that licensees are under to disclose material facts. In your original post you said you had a disclosure statement concerning the ownership?.which I don?t have the benefit of reading. I also don?t have the benefit of knowing how you set this deal up to begin with. In other words, since you don?t have a deed there are certain issues that COULD happen that would make delivery of the title to your buyer either impractical or impossible. On the other hand if you recorded a performance mortgage at the time you might have all these potential issues under control. Depending on how you had structured your lease/purchase with the original seller would have dictated how you should have made disclosure of material facts concerning the transaction. At a minimum I would have had a clause that stated that the transaction with the tenant/buyer was subject to my obtaining title from the original owner.

Do these disclosures or others present a problem to a prospective tenant/buyer?? They should?.but in my experience they don?t. My typical tenant/buyer has tended to be somewhat unsophisticated in real estate matters, in addition to not having many other alternatives in terms of acquiring a property. These emotional aspects of their situation often overrule the potential realties of the risks of delivering title. My attitude has been that this is a situation that I don?t take advantage of. Therefore I make sure I have mitigated the risks of these situations BEFORE I will sell it to a tenant/buyer.

One of the somewhat typical problems in a l/o is that when the tenant/buyer decides not to pursue the transaction further, sometimes he wants his money back, eventhough the contract states that the option consideration is non-refundable. As far as I?m concerned I?m not open to threats etc regarding this. I?m willing to live up to my part of the bargain, and I expect him to live up to his. You don?t say here whether the tenant is in default at this point, but if he is, I would act accordingly. I might also find a Realtor willing to list the property. You may have to educate the Realtor that there is no problem in delivering the deed (if in fact this is the case). You do have an option, the exercise of which will give you the deed to deliver to the next buyer. I might attempt to strike a deal with your tenant that you will sell the house, and give him his rightful portion of the proceeds according to the contract.

As to your fear regarding the real estate commission, have an attorney review the paperwork to see if you are in violation of anything in your state real estate act. I don?t think the real estate commission is necessarily something to fear if you have presented the material facts in your disclosure. One thing for sure though, a report to the real estate commission is often the first threat made to a Realtor?.and one that is amazingly effective. As long as you have your ducks in a row, it?s not something I would personally fear.

By the way, I think disclosure is an important consideration for anyone who is doing a transaction of any type. It?s important to look down the road to the day when a dispute comes up, and how your paperwork will appear in court.

JPiper


#2

Lease options, partners and lawsuits - Posted by Rob

Posted by Rob on October 22, 1998 at 21:13:08:

For those of you doing lease options, I thought I’d share a story about a situation that I’m now facing.

This past winter, my partner and I took a lease option under our corporate name. We sub-lease optioned it to a tenant/buyer for $5000. He moved in and immediately did $10,000 worth of upfit to the basement. As fate would have it, he changed his mind about owning the house because he saw another he liked more. He went as far as to buy the other house and move out of ours with the thought that he would simply list it with a discount realtor, sell it and end up breaking even. Naturally the realtors who looked at the house would not list it b/c he only had an option. When the tenant/buyer realized that we only had an option and we did’nt own it, he hit the roof.

Of course we had the deal tied up property including a lease option disclosure statement signed by him stating that we made no representations about the ownnership. In fact I use Bill Bronchick’s agreements on the tenant/buyer side. He hired a lawyer to look into the whole thing and said that his lawyer reccommeded that he sue us for $30K stating that we mislead him about our ownership interest. Whats more (important even) is that the lawyer also threatens to file a complaint against my license with the state real estate commission.

He tells my partner that he would walk away if we gave him $10,000 for finishing the basement. My partner thinks that we should pay him, sell the house and come out even to avoid the whole legal party.

KEep in mind that there is enough spread in the deal in order to make this work. At worst we would break even, but we probably stand to make a couple of thousand.

What would you do?

The only think that bothers me is the real estate commission complaint.


#3

Re: Lease options, partners and lawsuits - Posted by JohnBoy

Posted by JohnBoy on October 23, 1998 at 11:19:20:

Does your contract have a clause pertaining to who pays for any attorney fees?

Example:

ATTORNEY FEES AND COSTS: If any litigation is instituted with respect to enforcement of the terms of this agreement, the prevailing party shall be entitled to recover all costs incurred, including, but not limited to, reasonable attorney’s fees and court costs.

If you have any type of clause like this, then it becomes a question of whether or not you think you can win.

Do you know if the tenants attorney has seen all the documents he signed pertaining to this? Sometimes people just get on the phone and start crying to their attorney’s about something and the attorney tells them what they could do before getting all the facts first. They ask the client certain things that the client may not be aware of and based on that information the attorney says what they could do about it. Sometimes the attorney will tell the client to say certain things in an effort to scare the other party into complying with what they want.

Has his attorney contacted you about this? Have you recieved a letter from the attorney? Or is all this crap coming from the tenant? Ask the tenant for his attorney’s name and number. Tell him you would like to have your attorney speak to him. Tell him you would like to avoid seeing him lead down the wrong path by some money hungry attorney thats only interested in collecting a fee from him. Tell him in the end he will end up fighting a counter suit and will be liable not only for his own attorney fees, but your attorney fees as well including court costs and breach of contract.

This kind of reminds me of the time the company I worked for was being threatened by a lawsuit once. I know this wasn’t regarding a real estate transaction and was nothing to what you may be up against here, but its the principle of it that applies.

I was the manager of a dry cleaners in CA. This young woman comes in and drops off a load of cleaning. She picks up her clothes and leaves. Later her mother calls and says we lost her daughters sweater. After going back and forth on this we figured out the daughter didn’t like the sweater. (Her mother had bought it for her as a gift). It appeared that the daughter used the cleaners as her excuse as to why she no longer had the sweater. (the cleaners lost it) So her mother keeps coming down to the store and screaming we lost it and we are going to pay for it. Finally I told the mother to leave. She got all upset because she couldn’t believe our attitude over this and the way we were treating her. I told her this was a problem between her daughter and us, not her. Its her daughters sweater, she supposedly brought it in for cleaning and she was of legal age. What we do about this was none of her business period!

A week later I get a letter in the mail from her attorney demanding payment of $50 or they will file suit and sue for the sweater, emotional distress and mental anguish that we caused the mother. I showed the letter to my supervisor and the owner of the business. They said to just pay the $50 that it wasn’t worth the trouble over $50. I told them this lady was wrong and we had no obligation to her for anything. She wasn’t the customer that supposedly brought in the cleaning. It was her daughter that didn’t live at home and she was 19. They said I should just pay it and be done with it.

Since my salary was based on a percentage of the business, I was the one responsible for paying any claims out of my percentage. So I told them I would not pay for this. They said to pay it out of the stores percentage. I still refused. this was a matter of principle to me. So I called her attorney and said I’m ready to go to court and I’m prepared to file a counter suit. I never heard a word about it since.

I figured unless this woman had this attorney on some sort of a retainer, that letter probably cost her more than the $50 she wanted.

So you might try talking with the tenants attorney directly about this matter and explain you have not done anything illegal. You have a signed disclosure by the tenant that acknowledges you were not the owner. You have a legal contract between you and the owner of the property that gives you the legal right to sub-lease and sell the property to whom ever you choose. You have not mislead the tenant in any way. The tenant was interested in buying the property. You agreed to sell him the property via lease option in which you have a legal right to do. If the tenant feels they have built equity in the property that they would like to recoupe, then they can sell the property to someone else by exercising their option to purchase the property. You would be more than willing to list the property for the tenant if they wish to do so. If the tenant would like to vacate because of this other house they decided they want instead, you would even be willing to let them leave and sell the property for them. After you secure a buyer with a sale price approved by the tenant and close on the property you would be willing to give them any amount left over from the sale that is over and above the purchase price they agreed to buy the property for plus any lost rental income they were obligated to pay until the property sells, plus any costs incurred by you in order to get the property sold and the property is closed on. Your tenant has entered into a legally binding contract and you are ready to fight this in court and will sue for your attorney costs and court fees including a counter suit against the tenant if this is something they wish to go forward with.

Before you just hand this guy back several thousand dollars I would at the very least sit down with my own attorney and go over the contracts to see what his opinion would be. If your willing to hand out a few grand, whats another $200 to see how strong of a defense you may have?

Good luck with this and let us know what you decided to do with it.


#4

Re: Lease options, partners and lawsuits - Posted by JPiper

Posted by JPiper on October 23, 1998 at 02:14:17:

I don?t exactly see the problem here.

First, you CAN sell a house without the deed. Perhaps you should list the house for him since you?re a Realtor.

Second, you have a signed disclosure.

Third, you have not violated any real estate regulations that I can think of.

I have a rule of thumb. I don?t like lawsuits, and I don?t like spending money on lawyers. HOWEVER, I don?t like getting a reputation as a pushover either. My first step would be to try to work it out amicably. Use your creativity to figure out something along those lines. But on the other hand, if push comes to shove, I would hire a real mean lawyer to fight this, and perhaps come up with some type of countersuit. Once people get the idea that you roll over everytime someone barks?..well, you get the idea.

JPiper


#5

Re: Lease options, partners and lawsuits - Posted by Rob

Posted by Rob on October 23, 1998 at 08:17:08:

THanks for the input. Your last comment is what really hits home for me.

Keep in mind that I work full time as a commercial broker. We did offer to list it and that seemed to be going fine until he called an attorney who completely changed the tenant/buyer’s attitude… imagine that.

The good thing about the situation is that the tenant/buyer improved the property by finishing the basement to the tune of $10K-15K, plus giving me $5000 as option money. I figure that it would cost about $3000-4000 for a nasty attorney to litigate this and about 1-2 mos in lost rental income to relet and/or sell the property (which is about $2400). If I gave the tenant/buyer $8000 to walk away, I’d say that the extra $2600 is worth the hassle of the time committment and facing RE Boad inquiry? (of course it may take me every bit of two mos. to sell it in which case I’m really looking at $5,000, maybe still not a bad situation).

The question that I am wrestling with is not one that most folks on this board needs to deal with,“How do you represent your interest in the property to the tenant/buyers when you are required to disclose info as a broker?”

What that really says is that how many people will be scared away from the property if they know its a sublease option situation?

Keep in mind that your ad is required to say “owner-broker” in my mind an option and signed-notorized deed help in escrow is an ownership interest. WHat do you think?


#6

Re: Lease options, partners and lawsuits - Posted by mjs

Posted by mjs on October 23, 1998 at 17:58:13:

If the lawyer is not a RE lawyer he might not know the laws and be blowing smoke. Try and comtact the lawyer and discuss why he thinks there is a problem.
If your contract states that the buyer was to be compensated for any improvements then he could possibly recoup some money.
But first find out why he lawyer wants litigation.
THE other posts gave some pretty convincing points.
Don’t be afraid to ask questions first.
And don’t give the lawyer any $. Sounds like a scare tactic. If you have Bronchicks course you should be able to contect him for some advice.
Good luck