The Lease Option and Lease Purchase Alternatives

Real Estate Closing

Many homeowners who are extremely motivated to sell their homes often overlook the lease option or lease purchase alternatives to home sales. While certainly not a perfect solution, these alternatives may be quite useful in avoiding a short sale or foreclosure.

A lease option agreement is a contract with a deposit of option money granting to the tenant the option to purchase the property upon certain fixed terms and conditions at a particular date in the future. If the tenant does not exercise the option in accordance with the terms of agreement or is otherwise in default under the agreement, the tenant loses the right to purchase the property and forfeits any and all interest in the option money paid by the tenant. If the tenant does exercise the option to purchase, the tenant is given credit for the option money consideration against the purchase price.  The format of a lease option agreement can vary, but typically consists of a lease with provisions concerning the option to purchase, i.e. when and how the option can be exercised as well as the terms of the purchase. Oftentimes, the terms of the purchase are set forth in a real estate contract attached to the lease option agreement, and are incorporated by reference into the lease option agreement.

A lease purchase agreement is really nothing more than a real estate contract with a delayed closing date, with the Buyer leasing the property until the closing date. The Buyer pays an earnest money deposit to be applied against the purchase price at closing. If the Buyer defaults under the lease, the Buyer will be deemed to have defaulted under the purchase contract and vice-versa. If the Buyer defaults, the Seller will have all remedies set forth in the contract and the lease arising out of the Buyer’s default.

One of the main sticking points in the negotiations of these types of agreements is the responsibility for repairs or replacements which may become necessary during the term of the agreement. It is almost always the case that the tenant is responsible for normal maintenance, but who is responsible if the roof leaks or the refrigerator needs to be replaced? The answer may depend on which of the agreements is being utilized. A lease purchase agreement is often times being done at the request of the Buyer who needs time to establish good credit or save money for a down payment. Under these circumstances, there is a stronger basis to require that the Buyer be responsible for repairs and replacements. As a compromise, the parties may be able to agree that the Seller is responsible for the first fifty dollars ($50.00) or one hundred dollars ($100.00) of each repair.

Some concerns for the Buyer under either of these agreements is the potential for title problems or a foreclosure action against the Seller which may result in the Seller not being able to convey marketable title to the property or worse yet, the Seller losing title to the property and the tenant/Buyer potentially being evicted from the property. Of concern to the Seller are the liability issues and other potential problems associated with being a landlord.

In many cases, the Seller under either of these agreements will be able to sell the property for a higher price than a distress sale or pre-foreclosure sale. Additionally, these alternatives do not result in negative credit experience to the Seller.

This article is intended to be a very general discussion of lease option agreements and lease purchase agreements. There are numerous other issues and considerations in connection with these documents. It is imperative that you consult with competent legal counsel to address these and other issues associated with lease options and lease purchase agreements.

Proper Use of a Power of Attorney

Escrow Agreement

A power of attorney grants authority to another person, as agent, to do all acts on behalf of the principal as described in the power of attorney. A power of attorney should only be used for a real estate transaction when it is extremely difficult or impossible to obtain the execution of the documents by the principal. With the existing ease of sending documents via overnight mail, electronic mail, and facsimile, it is only in the rarest of circumstances that a power of attorney should be relied upon in connection with a real estate transaction.

A power of attorney must be executed with the same formality of the instrument to be executed under it. Since a deed requires two (2) subscribing witnesses and an acknowledgment by a Notary Public, so too must the power of attorney be executed by the principal in the presence of two (2) subscribing witnesses and an acknowledgment by a Notary Public. By the time the principal can sign a power of attorney in the presence of two (2) subscribing witnesses and a notary public, the principal can in most circumstances sign the deed and other closing documents instead of the power of attorney.

Where the principal’s property is to be placed under Contract, conveyed by deed, mortgaged, etc., the well established rule is that the instrument must name the principal as the Seller, Grantor, or Mortgagor, as appropriate, and it must be clear from examining the entire instrument that it is an act of the principal, not the agent. The preferred method of execution of the instrument is for the agent to sign the principal’s name by himself, as agent, e.g. “Steven R. Greenberg, by John Doe, his attorney in fact”.

The power of attorney must be specific, i.e. it should plainly state the clear authority for its particular use in the transaction. The “power to sell real and personal property” does not include the power to execute a deed to convey title to the property. Instead, the power of attorney should expressly state that the attorney in fact is authorized to “convey title” or to “execute and deliver a deed” to any real and personal property which I may own in order to be effective for this purpose.

A copy of the power of attorney should be delivered to the closing agent at the earliest opportunity to confirm that it will be sufficient for its intended use. Often times, the closing agent is presented with the power of attorney either close to the Closing Date or worse, at the closing, only to find out that the power of attorney will not be adequate for the transaction. While the power of attorney may be sufficient in another state where it was prepared and executed, the laws of the State of Florida will control in the determination of whether the power of attorney will be sufficient for the transaction. Also, many lenders will not allow the borrower (buyer) to execute loan documents under a power of attorney.

It is also important to remember that the original power of attorney will have to be recorded in the public records of the County in which the property is located. A conveyance, transfer, mortgage, or lease, of real property under an unrecorded power of attorney is not valid against creditors or certain purchasers for valuable consideration and without notice.

The power of attorney is revoked by the death of the principal. Also, a durable power of attorney may be relied on until such time as the principal dies, or revokes the power, or is adjudicated incapacitated. Furthermore, the power of attorney may terminate by its own terms if there is a termination date set forth in the power of attorney.

Why do You Need a Survey?

Escrow Agreement

Surveys are involved in almost every real estate transaction, except for transactions involving the sale of a condominium. The Contract for sale of real estate will give the Buyer a limited period of time to both obtain the survey and to put the Seller on written notice of any survey defects. A survey map depicts the shape and size of the lot and all improvements located on the lot. It should also show all setbacks, easements, and other matters observed by the surveyor. Of course, the survey map will include a legal description of the property surveyed and should be certified to the buyer, the title underwriter, the closing agent, and the buyer’s lender, if any. Finally, the survey map should include the surveyor’s signature and seal, which is a representation by the surveyor that the survey map is in compliance with the Minimum Technical Standards for Florida.

The title insurance policy includes “Survey Coverage.” Survey coverage is provided by deleting or modifying the standard survey exceptions in the title policy. The standard survey exceptions in the title policy are as follows:

1.         Rights or claims of parties in possession not shown by the public records.

2.         Encroachments, overlaps, boundary disputes, and any other matters which would be disclosed by an accurate survey and inspection of the premises.

3.         Easements or claims of easements not shown by the public records.

In order for the closing agent to delete the standard exceptions, there must be a careful review of the survey map. The closing agent should raise specific exceptions to individual survey defects and all parties to the transaction should be put on written notice of such defects within the time frame authorized in the Contract. It is imperative that the closing agent (attorney or title company) provide to the surveyor a copy of the title commitment so that the surveyor will be aware of such matters as easements and deed restriction setbacks. It is not the job of the surveyor to search the public records to determine matters of public record affecting title to the subject property other than those matters appearing on the plat of the subdivision.

Prior survey maps can be utilized for the current real estate transaction in certain circumstances. In order for the closing agent to rely on the prior survey map for purposes of deleting the standard exceptions (thereby saving the buyer the cost of a new survey), the seller must provide an Affidavit to the closing agent confirming that:

1.         They are the owners of the property.

2.         They have reviewed a copy of the survey map of the property.

3.         Since the date of the survey map, there have been no additional improvements constructed on the property and there have been no modifications or additions to the improvements shown on the survey map.

4.         Since the date of the survey map, there have been no improvements or fences erected on any adjacent property.

The Buyer needs a survey map of the property being purchased in order to be protected. The closing agent should be carefully skilled at reviewing the survey map. The closing process is a team effort and only skilled professionals should be employed for the best results.

Escrow Disputes

Escrow Disputes

This article will address issues that arise in connection with escrow disputes pertaining to the Buyer’s earnest money deposit (the “Deposit”) paid pursuant to a Contract for the Sale of Real Estate (the “Contract”).

Escrow disputes arise when the Buyer and Seller cannot agree to the disposition of the Deposit paid by the Buyer under the terms of the Contract.  In most cases, the dispute arises when the Buyer believes that the Buyer is entitled to a refund of the Deposit because a contingency of the Contract has not been satisfied or waived, the Buyer believes that the Seller has defaulted under the Contract and the Buyer demands a refund of the Deposit, or the Seller believes that the Buyer has defaulted under the Contract and the Seller claims the Deposit.  In any event, if the Seller makes a claim on the Deposit or refuses to agree to allow the Escrow Agent to refund the Deposit to the Buyer, there becomes an escrow dispute.

Escrow disputes are handled differently depending on whether the Florida Association of Realtors (the “FAR”) form of Contract or the Florida Association of Realtors/Florida Bar (the “FAR/BAR”) form of Contract is utilized.  In the FAR Contract, disputes concerning entitlement to Deposits made and to be made are handled as follows:

“Buyer and Seller will have 30 days from the date conflicting demands are made to attempt to resolve the dispute through mediation.  If that fails, Escrow Agent will submit the dispute, if so required by Florida law, to Escrow Agent’s choice of arbitration, a Florida court or the Florida Real Estate Commission.  Buyer and Seller will be bound by any resulting award, judgment or order.”

The FAR/BAR Contract provides that, “If any litigation occurs between the parties as a result of the Contract, the prevailing party shall be entitled to recover reasonable attorneys fees incurred and all court costs for both original and appellate proceedings.”  Accordingly, there is no obligation for mediation and unless the Buyer and Seller agree to binding arbitration, the escrow dispute will be handle through the courts.

It is worth noting that the listing agreement utilized by the Multiple Listing Service (the “MLS”) provides that the Brokers are entitled to receive a portion of the Deposit forfeited by the Buyer, provided that the amount to be received by the Brokers shall not exceed the amount each Broker would have received had the closing occurred .  Therefore, it is critical that the Seller insist on a significant amount of a Deposit from the Buyer.  Otherwise, it is too easy for the Buyer to walk away from the Deposit and it is not worthwhile for the Seller to pursue the Deposit, leaving the Seller with legal fees and costs and then paying over one half of the forfeited Deposit to the Brokers.

When terminating a real estate Contract, it is critical that a Contract Termination and Release of Deposit Agreement be utilized.  This is somewhat of a standardized form.  This Agreement formally terminates the Contract and provides for the disposition of the Deposit.  Many Buyers and Sellers are under the impression that as long as the Buyer and Seller are fighting over the Deposit, the Seller cannot market and sell the property.  However, if the parties are not looking to specific performance as the remedy for the default of the other party and instead, are only fighting over the Deposit, the Seller can market and sell the property to a third party.  Care should be taken to confirm that the dispute only involves the Deposit (and not the property) before the property is re-listed and sold

Escrow Agreements

Escrow Agreement

Oftentimes, an escrow agreement will be necessary for the purpose of payment for repairs to be completed post-closing. If the escrow agreement does not contain the essential elements, the Buyer or Seller may end up with unexpected liabilities.

The Florida Association of Realtors (“FAR”) Contract provides in pertinent part that, “If Seller is unable to complete required repairs or treatments or meet the Maintenance Requirement prior to closing, Seller will give Buyer a credit at closing for the cost of the repairs and maintenance Seller was obligated to perform.”  Buyers should be cautions about agreeing to accept a credit from the Seller since most institutional lenders will not allow credits for repairs. Moreover, it is usually the case that the parties will not know the exact cost of the repairs and the Seller will instead insist on an escrow of funds from which the repairs will be paid with all amounts remaining thereafter being paid over to the Seller.

A properly drafted escrow agreement will address, at a minimum, the following items:

1.        The name of the Escrow Agent. Someone (or some entity) needs to be named as the Escrow Agent and should sign the escrow agreement agreeing to hold and disburse the escrow funds in accordance with the terms of the escrow agreement.

2.        The names of the parties to the escrow agreement must be clearly set forth in the document and all parties should sign the escrow agreement.

3.        The amount of the escrow funds must be specified. The Buyer’s agent should always let the Buyer select the amount of the escrow funds to be held based on the written estimate from a contractor selected by the Buyer. Consideration should also be given as to whether the Seller would be obligated to pay the additional amount if the cost of repairs exceeds the escrow funds. From the Seller’s perspective, the Seller may want to limit the Seller’s liability to the amount of the escrow funds.

4.        The escrow agreement should clearly state the repairs to be made. If the repairs to be made are not clearly identified, the Buyer may try to utilize the escrow funds for other repairs which the Buyer may become aware of after the closing. This may result in litigation over the escrow agreement.

5.        It is imperative that the escrow agreement provide for the maximum period of time that the escrow funds will be held. Otherwise, there may be no provision for the eventual release of the escrow funds and the termination of the escrow agreement.

6.        The escrow agreement should be clear as to whether the Seller or the Buyer is responsible for getting the repairs completed and what are the rights and obligations of the parties in the event that the repairs are not timely completed.

7.        The procedure for the release of the escrow funds should be set forth in the escrow agreement, i.e. what approvals or documents must be given to the Escrow Agent prior to the release of the escrow funds.

8.        The method of dispute resolution should be clearly established in the escrow agreement. A dispute under the terms of the escrow agreement is not a matter to be resolved by FREC or a FREC disbursement order and instead, will probably be handled through the judicial system.

It is evident that an escrow agreement is not a document to be loosely drafted at the closing table. In fact, a real estate attorney is best suited to drafting the escrow agreement, usually at no additional charge to the Buyer when the attorney is handling the closing, in order the best protect the interests of the Buyer.

Sale of Homestead Property and the need for Spousal Joinder

Constitutional homestead of Florida property has been addressed in a previous article; however, there is now case law that mandates a closer look at your responsibility as a real estate agent with regard to contract negotiations and execution.

Under the Florida Constitution, a married person cannot convey title to his/her homestead without the joinder of the spouse in the Deed. For title underwriting considerations, both the owner and the spouse must execute the same Deed and not sign on two separate Deeds. The joinder requirement also exists in connection with the mortgaging of homestead property.  If a person is legally married (no Dissolution of Marriage has been entered by a Court), and he/she wants to convey or mortgage his/her homestead property, the spouse must sign on the deed or mortgage for purposes of waiving the homestead interest of the spouse.  The focus of this article is on conveying homestead property owned by only one spouse.

The spousal joinder requirement was the subject of a relatively recent Florida Case, Taylor v. Maness. In that case, the title to the marital residence (homestead) was vested solely in Mr. Maness’ name. Mr. Maness decided to sell the property and entered into a contract for the sale of the property. The contract reflected only Mr. Maness as the seller and the contract was not signed by his wife. Mrs. Maness refused to sign the deed transferring title of the property to the Taylors, claiming that she had a homestead interest in the property. The Taylors sued for specific performance of the contract, fraud in the inducement and negligent misrepresentation, based on the seller’s inability to sell the property. The trial court entered a summary judgment for the seller since there was no genuine issue of material fact relating to Mrs. Maness’ homestead interest and that the seller was entitled to judgment as a matter of law.

The Taylors appealed the decision to the Third District Court of Appeals. The Taylors argued that because the Manasses failed to claim a homestead tax exemption, it evidences that the property was not the Manesses’ homestead. The Court confirmed that failure to claim the homestead tax exemption is not evidence that property is not homestead property. There is a significant distinction between homestead for tax purposes and the Constitutional protection pertaining to homestead property. The Court reasoned that the Taylors could not specifically enforce the contract since Mrs. Manass did not sign the contract and could not be compelled to waive her homestead rights.

Also of interest in the case is the Court’s ruling that the Taylors were not entitled to damages for fraud in the inducement and negligent misrepresentation. The Court held that Mr. Manass did not misrepresent his ownership of the property and accordingly, there was no misrepresentation and no failure in the inducement. In essence, the Taylors had no remedy.

This case underscores the importance of ascertaining whether the property is the homestead of the seller whenever the seller is married and title is held in the name of only one spouse. It is critical that the seller’s spouse join in the execution of the contract for sale of the property. Otherwise, the buyer may find himself in the same position as the Taylors without any legal remedy. If, for example, title to the property is in the name of the husband, the correct seller on the contract would be “John Smith, joined by his wife, Jane Smith” and the contract and all addendums should be signed by both spouses.