Posted by JPiper on October 22, 1998 at 13:08:20:
I think the point you’re missing here is that when the lease and option are written on the same document, you may well have equitable title issues IF the tenant buyer goes to court over this issue.
Your documents may say anything that you put in them, and the tenant may well accept them. But when you get to court the documents will be interpreted not just based on what they say, but based on established legal doctrines and case law. One of those doctrines has to do with equitable title. If it is determined that based on your document that equitable title exists, the judge could rule that you need to foreclose under the document rather than evict. If this is the case the foreclosure would need to be a judicial foreclosure, which would necessitate time varying on the existing court system, and cost. Obviously these would exceed the time and cost of an eviction.
The question is not whether the tenant has a leg to stand on. If he is in default he is in default. The question is how you legally remove the tenant once he’s in default. Having one document rather than two with your tenant heightens the risk that a court might determine your situation to be an equitable title situation. That’s a risk that I personally would not want to take.
One other point, there is some legal precedence for the idea that the separate lease and option MAY not violate a due on sale clause…whereas an agreement on one document might. Again, a court would determine this.
One of the areas that we’ve seen this in the past is the contract for deed. Many of the contracts state that if the buyer defaults, a quit claim will be filed, and the buyer becomes a renter, and thus subject to an eviction. Courts in some states have ruled that despite this agreement, that the buyer has equitable title, that he can’t sign away his right to a foreclosure, and therefore the contract must be foreclosed on judicially.
As for your thought that by separating the documents that you tranfer the option, this is a valid point. I don’t transfer options, so this is a moot point to me. But certainly it’s an idea worth considering prior to entering into the agreement, and structuring this way if that is your goal.