As someone selling a rent-to-own home, you need a top-notch agreement for the lease (1). Your rental or lease agreement indicates your responsibilities as the seller and the other party’s responsibilities as the tenant(s) and eventual buyer.
Making sure everyone is happy with the agreement in its entirety can avoid issues in the future.
While you can choose lease rules to fit your needs, most clauses are included to meet local and state landlord-tenant laws and should be written with legal aid. This article will delve into the most important clauses to include with your rent-to-own home.
Tenants’ Rights and Their Effect on Appropriate Clauses
When renting or leasing a property, every tenant has certain rights, so you need to be sure you don’t hamper these things. Tenants are entitled to the following:
- The right to a habitable and safe space
- The right to privacy and reasonable notice of entry
- The right not to be discriminated against
- The right not to be charged unreasonable lease prices, fees, or security deposits
There are two essential things of which to be aware. First, you cannot add any clauses to your agreement that go against a federal or state law. If a clause goes against the law, it is void and cannot be upheld in court.
In addition, based on Fair Housing Laws, you cannot discriminate against those staying in the property. So, for example, you can’t choose who does and doesn’t live in the home based on race, gender, age, and more.
Common Rent-to-Own Lease Clauses
A lease-purchase agreement consists of two contracts. One is for the lease period, and the other is for the end sale. The two contracts can include provisions that affect the other. For instance, if a tenant stops paying rent, which breaches the contract, it might also create a breach in the purchase contract.
When creating clauses for a rent-to-own property, it’s essential to work with someone who has a working knowledge of the law to avoid issues. The clauses below are relatively standard but should always be reviewed against the laws in your location:
- Rent Liability – States that each tenant is responsible for the total rent if the other tenants do not pay it.
- Severability Clause – Indicates that if some part of the lease is invalid, the rest still applies.
- Access to Premises – States you can access the home with notice of entry during reasonable hours.
- Use of Premises – Gives information about how the house can be used, such as only for residential use.
- Sublet Rules – Offers a statement that the home’s current owner must give permission before the property allows subletters.
- Disturbance Clause – This shows that tenants shouldn’t disturb other people nearby, especially during the night hours.
- Lessee to Maintain – Indicates the tenant must care for and maintain the property
Clauses Related to the Lease Portion
When you create a lease agreement, it should have many elements of an average lease – but you also need additional clauses. For instance, the buyer may be required to handle maintenance costs, insurance fees, and property taxes.
In addition, you don’t want to forget to indicate how long the lease period will be in place and what the rent amount is every month. Unlike a typical rental agreement, which might last anywhere from one month to two years, lease-purchase agreements will typically span up to three years (2).
Some of the specific clauses you want at this point include down payment, purchase price, and option fee amounts.
Both the buyer and seller must agree on an option fee, which makes it required to sell the home to the tenant at the end of the lease if the tenant desires to do so. At this point, you cannot change your mind as the seller. The fee can be low or high and isn’t refundable.
This agreement should also explain how much of the rent is going toward the down payment for the home. For example, a tenant might be paying $4,000 each month on a $500,000 house, where $800 of the rental amount is part of the down payment.
Once a two-year lease is over, this means that the buyer will have $19,200 for the down payment. This is just over 3.8% of the home cost and qualifies most people for mortgages. However, the down payment is forfeited if the tenant decides that the home isn’t right for them and pulls away from the sale.
Clauses Related to the Sale
For the sale portion of the agreement, other terms will need to be approved to outline the purchase process. The clauses under this part of the agreement will come into play when the lease period has finished.
Regardless of how long the lease will be in place, both the buyer and seller will collaborate and agree on a purchase price when the lease is signed. This number will be determined based on market value; however, it will likely be slightly higher to account for appreciation.
Regardless of whether the market goes up or down, this number will still apply. The buyer and seller are bound to it after agreeing on it and signing a contract saying so.
The person buying the rent-to-own home will need to take out a mortgage loan on the home, condo, or other property. In some cases, the tenant might have trouble qualifying for a mortgage at the beginning of the process. This is the time for them to share their down payment timetable with a lender to potentially get a better deal.
Once the lease has been completed, the funds will be released by the lender and moved to the seller, who will hand over the title to the new buyer.
Keep in mind that it’s in your best interest to work with a lawyer on your contract before anything is signed. Many of the most common agreements will eliminate the contract of sale if the buyer cannot get financing. However, some will require a full repayment in either case.
As someone offering a rent-to-own home, treat the purchase agreement just as seriously as you would a traditional home sale. In the end, that is precisely what is happening – it just takes longer to reach the end goal. Make sure an attorney looks over your agreement to be sure you’re covered in every way possible.
(1) – Investopedia
(2) – Nolo.com – The Basics of Rent-to-Own
Nolo.com – Lease-Rental Agreement