Question for Bronchick - Posted by Eric (NH)

Posted by Redline on January 13, 1999 at 19:11:58:

He was caught on the phone - not in bed. But I still agree with your wise legal opinion: LIE.

Question for Bronchick - Posted by Eric (NH)

Posted by Eric (NH) on January 12, 1999 at 23:55:39:

In the article on lease option strategies, Bill Bronchick advocates using separate lease and option purchase agreements when you are the seller, in part, “because 75% of the time, tenant/buyers lose their paperwork…[and when in court] don’t show the option paperwork until asked…” Other strategies recommended, including receiving a security deposit, are all geared towards making the arrangement look solely like a straight rental arrangement.

I’m curious, then, is Mr. Bronchick advocating that a seller attempt to lie about the arrangement if the tenant/buyer has lost the paperwork? If not, why the cloak and dagger routine? Given that the forms are very pro-seller, wouldn’t the seller be protected even if all of the terms were on one document? And if not, then how honest is the entire contractual arrangement?

Eric (NH)

Re: Question for Bronchick - Posted by Bronchick

Posted by Bronchick on January 13, 1999 at 13:49:07:

No, Eric I never advocate lying (except, possibly, when you are holding the highest executive office of the United States and are caught in bed with a 22 year-old subordinate).

What I am suggesting is that since your clear intention as a landlord is to create a landlord-tenant relationship and not an installment land contract, do not raise the issue of the option unless the tenant does. Landlord-tenant court Judges have a bad habit of transferring cases out of lower courts to the “big boys” court to resolve ownership issues, since the landlord-tenant court has no jurisdiction to make such a ruling. The landlord usually wins on the issue, but the case may take weeks, even months to get resolved.

Thus, if the tenant loses his paperwork or doesn’t show up in court at all, I bring only the lease into court, since the only relevant issue at this point is whether rent was paid and whether I should be entitled to possession.

Re: Question for Bronchick - Posted by JPiper

Posted by JPiper on January 13, 1999 at 11:38:02:

A lease/option is a kind of hybrid transaction. On a spectrum of transactions it would fall somewhere between an outright sale and a rental agreement. Because of this, it?s possible for the lease/option to look a little more like a sale, or a little more like a rental. For the purposes of our court system and the IRS, you want this to look a little more like a rental.

As Irwin points out below, having your lease/option characterized as an equitable sale by the court will require a foreclosure rather than an eviction?.an event that will cost more money and more time.

The IRS is also a factor in this. If your transaction is characterized as a sale rather than a rental, it will have different tax ramifications. Here you want your transaction to look as much like a rental and as little like a sale as possible. A shorter lease period, a small rent credit, etc?.all lead to making the transaction seem less like a sale. A security deposit is something usually collected by landlords. Just understand that it is refundable.

Bronchick is trying to advise you in ways to keep you out of trouble with the court and the IRS. Separating the documents has been the prevailing wisdom for at least the last decade that I?m aware of. This in and of itself in my opinion will not be enough, but it?s a step. And after all, the lease and the option are two distinct transactions in my mind.


Re: Question for Bronchick - Posted by Irwin

Posted by Irwin on January 13, 1999 at 07:14:52:

I think I can clarify what Bill Bronchik meant. When a l/o is contained in the same agreement, unless it is very carefully drafted, there is a chance that a small claims court might say it is really a land contract and has to be foreclosed. Small claims courts don’t have jurisdiction over foreclosures, so you would have to start over in a new court, with a lawyer. This is a time consuming and expensive proposition, and all the time, your tenant will be living rent free and laughing at you. I’m in exactly that situation right now. The small claims judge set a hearing three months off to determine whether or not she does have jurisdiction. If it goes against us, and it probably will, the way the contract was written, we’ll lose three months in addition to the 8 or so that it will take to foeclose.
(The contract in question was a pre-printed lease form with the option to purchase for a stated price written in. The kicker was that all lease payments were to have been treated like land contract payments at X %, with a 30 year amortization. BIG MISTAKE & btw, I didn’t draft it.)
I’m not going to respond to the “cloak and dagger” part of the question. After you have a few experiences with tenants in court, that question answers itself.

Also, if you do require a security deposit in a l/o, be sure that it isn’t the same money that is the option fee. Security deposits must be returned at the end of the lease, whereas option fees are not refundable.
Generally, I agree with Bronchik that separate agreements is the safest way to go; however, since I’m the one who will probably lose my copy of the option, I have them set up as two separate and distinct parts of the same contract. The contract should provide that any default in the payment of rent automatically voids the option to purchase.

Re: Question for Bronchick - Posted by Eric (NH)

Posted by Eric (NH) on January 13, 1999 at 23:08:25:

Thanks to everyone for the clarifications and advice.

Eric (NH)