Lease-Options: A Guide for Sellers
A GUIDE TO OPTIONS: 'LEASE-OPTION' OR 'MANAGED OPTION' AGREEMENTS As mortgage lending has become increasingly difficult to obtain and housing prices have dropped, option agreements have become an attractive alternative to an immediate sale for many sellers and buyers. It is important, however, to understand how an option works and what your legal rights are under the option agreement. What Is An Option? An Option is an agreement between a seller and a buyer by which the seller gives the buyer the right to purchase a property in the future at a certain price. How Is An Option Different From A Contract for Sale? An option is a binding contract, but it is not a contract for sale. The parties to an option agree that the buyer has the right to buy the property in the future at a certain price. The option does not force the buyer to buy. The option merely prevents you from selling to anyone else for the period of the option. If the buyer fails to exercise the option by the end of the option period, you are free to sell to someone else. Why Are Options Attractive? Options are attractive because they represent a firm expression of interest by the buyer. Most options provide the seller with either some money now or relief from managing a burdensome property, plus the promise of a sale in the future. Options are attractive to buyers because they lock in a price for a period of time, the buyer has the opportunity to alter or improve the property so they can get a larger mortgage on it when lending becomes more widely available, and the buyer may be able to take some cash flow out of the property now if they can rent it at a higher value. Many option-buyers are professional property investors or lettings professionals who know how to manage properties to get the most out of them and already have tenants waiting for properties. It is important for you the seller to understand the buyer's background and make sure they are competent property professionals before you enter into any contractual relationship with them. What Money Is Payable to the Seller? Like any property contract, options are supported by consideration. Consideration is something of value which changes hands between the buyer and seller. In the case of options, the consideration is usually money, but it can be interest in another property (in the case of house swaps). For a basic option, the up-front consideration may be very small (£1.00 to a few hundred pounds), but usually with the promise of more to come. This is where the 'lease-option' or 'managed options' come in. What Is A 'Lease-Option' or 'Managed Option' Agreement? A 'lease-option' is a bit of a misnomer, because no lease is actually created. What the seller gives to the buyer in a 'lease-option' is the ability to manage the property during the option period (a 'managed option'). The seller may receive a small monthly fee, or the seller may merely be relieved of the burden of managing a property that they no longer want to manage and cannot sell in the current market. Under a 'lease-option' or 'managed option' agreement, the seller steps out of the role of landlord and lets the buyer step into this role. There is a formal Management Agreement between seller and buyer that gives the buyer all the rights the seller would normally have in the property. For example, the buyer is able to enter into tenancy agreements, collect rent, and seek repossession of the property if the tenant fails to pay the rent. The buyer may also take over repayments of any mortgage or secured loan on the property, although you should be careful to review the terms and conditions of your mortgage to ensure that this does not violate your agreement with your lender. In most cases, the Management Agreement will be supported by a Power of Attorney. The seller gives the buyer a Power of Attorney so that the buyer has the legal right to act in the seller's stead in dealing with any third party in relation to the property. This includes tenants, mortgage lenders, letting agents, utility companies, insurance companies and other third parties the buyer would need to deal with in order to manage the property the way a landlord would. The Power of Attorney gives the buyer broad rights over the property, even though the buyer doesn't actually own the property yet. It is important for sellers to carefully read the Power of Attorney and ensure that they are comfortable giving these rights to the buyer. Why Do I Need All Of These Documents? Many sellers find the amount of legal documentation associated with the 'lease-option' or 'managed option' agreement overwhelming and frustrating. What is important to understand is that you are creating a long term relationship with your buyer and that unless the boundaries of that relationship are tightly defined, in writing, it is likely that a dispute will arise