Drafting a rent-to-own lease and purchase agreement for residential real estate can be tricky for new real estate attorneys. Here is one way to do it.
Before you start, consider that there are three separate transactions occurring and draft the documents for each transaction separately before you attempting to combine them.
First, start with the Lease. Assume the deal will go no further and draft the lease as your client would want a stand-alone lease.
Option to Purchase
Second, draft an Option to Purchase. Again, assume this is a stand-alone document. Think about what your client would want in it. For example, should there be an option fee? Is rent credited towards the purchase price? Does the option last beyond the lease or does the option terminate early if the lease is terminated?
Third, draft the Purchase Agreement. Again, assume this is a stand-alone document. Think about what your client would want in it. Make the closing date “thirty days from date Buyer exercises his Option to Purchase.”
Connect the Documents
Next, add a paragraph to the end of the lease saying “Landlord grants Tenant an Option to Purchase on the terms of Exhibit A attached hereto.”
Next, add a paragraph to the end of the option saying “This Option shall expire at 4:30 p.m. on [date] unless Buyer delivers to Seller all of the following before that time: one fully executed copy of the Purchase Agreement attached as Exhibit A and $____ earnest money.”
Finally, ask your client to execute two copies of all documents. The Buyer should execute two copies of the Lease and Option but not the Purchase Agreement. Give one set of originals to both sides.
Completed Rent-to-Own Lease and Purchase Agreement
You now have a self-executing rent-to-own lease and purchase agreement for residential real estate. Pat yourself on the back. Your job is done.
As you consider this type of transaction, be sure to think through the tax consequences of each of the payments and the reporting consequences if there are tax benefits, such as a renter’s credit. Also note that rent payments are generally taxable (income tax) to the recipient.