chapter 16 -Leases, Options and Contracts for Deed

The following eight covenants are common in most leases:

(1) Capacity to contract (2) Demising clause (3) Description of the premises (4) Clear statement of term (5) Specification of rent and how it is to be paid (6) In writing (7) Signatures (8) Delivery

rent amount and payment clause

- A rent clause stipulates the time, place, manner, and amount of rent payment. - It defines any grace period that is allowed, and states the penalties for delinquency

how is right of First Refusal different from an option

- A right of first refusal gives a potential buyer the first opportunity to buy a property when the owner decides to sell it. - Unlike an option, the potential buyer has no right to buy the property until the seller decides he or she wants to sell.

vendee's rights and obligations of a contract deed

- During the contract period, the buyer may occupy, use, enjoy, and profit from the property, subject to the provisions of the written agreement. - The vendee must make periodic payments of principal and interest and maintain the property. - In addition, a vendee may have to pay property taxes and hazard insurance.

it is common for an option to include provisions covering:

- How to deliver notice of option execution: This clause clarifies how to execute the option, exactly when the process must be completed, and any additional terms required, such as an earnest money deposit. - Forfeiture terms: This clause typically says that the optionor is entitled to the consideration if the option term expires. - Property and title condition warranties: In this section, the optionor warrants that the property will be maintained in a certain condition and that title will be marketable and insurable. - How option consideration will be credited: This clause states how the optionor will apply the option consideration toward the purchase price if the option is executed.

Why do developers often use land options

- Land options give developers time to evaluate the land and make sure it will work for their project without risk of losing the land. - This is done either for a low fee or in exchange for a study that influenced the developer to not exercise the option.

State contract laws determine the requirements for a valid lease. These laws generally require the following conditions:

- Parties: The principal parties (landlord and tenant) must be legally able to enter into the agreement; i.e., meet certain age, sanity, have ownership rights, and other requirements. - Property description: The lease must identify the property by legal description or other locally accepted reference. - Exclusive possession: The landlord must provide an irrevocable right to exclusive possession during the lease term, provided the tenant meets all obligations. - Legal and permitted use: The intended use of the property must be legal. A use that is legal but not permitted does not invalidate the lease but constitutes grounds for default. - Consideration: The lease contract must be accompanied by consideration to the landlord for the rights conveyed. How the consideration is paid does not affect the lease's validity, so long as the parties comply with the terms of the lease. - Offer and acceptance: For the lease to take legal effect, the parties must accept the lease and communicate their acceptance to the other party. - Signatures: The landlord must sign the lease to convey the leasehold interest. A tenant need not sign the lease, although it is prudent to do so in order to enforce the terms of the lease. Multiple tenants who sign a single lease are jointly and severally responsible for fulfilling lease obligations. Thus, if one renter abandons an apartment, the other renters remain liable for rent. - Oral versus written form: Both oral and written leases are binding. However, a lease for a period exceeding one year cannot be oral but must be in writing to be enforceable

From the seller's perspective, what are 3 benefits to participating in a contract for deed

- Tax Benefits - Large Pool of Buyers - Quick Sale - buyer is responsible for repairs - buyer typically pays taxes and insurance - higher sales price - higher payments - easy cancellation

In the case of a contract deed, When does the buyer receive full title

- The buyer receives title when he or she pays the final payment specified in the agreement. - all other contractual obligations need to be met for title to pass.

an installment sales contract may also be called

- a contract for deed - a land contract - a conditional sales contract - an agreement for deed

remedies for when buyer defaults

- cancellation, retention of monies received, and eviction. - foreclosure

buyer benefits for participating in contract deed transaction:

- home ownership - easy qualification - tax benefit of ownership - right to improve property - chance to improve credit - time to complete the purchase - right to repay

are options a financing device

- no, they serve well as a substitute for the financing that would otherwise be needed to hold land for future use. - Options are considered a more conservative approach than outright purchases to obtaining land for future use.

what does a contract deed offer

- offers a means for a marginally qualified buyer to acquire a property - The seller retains legal title to the property until the balance is paid; the buyer gets legal title to the property once the final payment is made.

vendor's rights and obligations of a contract deed

- seller is allowed to mortgage the property, sell or assign whatever interests he or she owns to another party - bound to the obligations imposed by the contract for deed. - In particular, the vendor may not breach the obligation to convey legal title to the vendee upon receipt of the total purchase price. - In addition, the vendor remains liable for underlying mortgage loans.

what happens when land is purchased rather than optioned

- the developer must pay interest charges during the pre-development phase. - Additionally, the developer is faced with the task of reselling the property if the project is canceled

a contract deed must include:

- the principal parties - the property's legal description - consideration: specifically what the parties promise to do - the terms of the sale - obligations for property maintenance - default and remedies - signatures and acknowledgment

To minimize risk, principal parties in a contract for deed should observe the following guidelines:

- use an attorney to draft the agreement - adopt the standard forms, if available - become familiar with how the contract will be enforced - utilize professional escrow and title services - record the transaction properly - be prepared for the possible effect on existing financing

According to a recently enacted Minnesota Statute, the vendee (buyer) must record the contract for deed within how long of its execution or face a penalty

4 months

what is a rolling option

A rolling option gives the optionee the right to add new parcels of land to an option as original parcels of the option are purchased.

What is a lease provision that gives the tenant the right to extend the lease for an additional period of time and sets forth the terms for the renewed lease? A.) A statement of terms B.) An option to renew C.) A rent clause D.) A consideration clause

A.) A statement of terms

Which part of a contract deals with the legal requirements to enter into a contract? A.) Capacity to Contract B.) Capacity of Age C.) Legal Capacity D.) Capacity to Render

A.) Capacity to Contract

In which provision would a landlord describe what activities can take place on the property? A.) Use of the Premises B.) Property Order C.) Location Use D.) Property Regulations

A.) Use of the Premises

what is an option

An option is an enforceable contract where, for a nominal fee, a potential seller grants a potential buyer the right to purchase property before a stated time for a stated price and terms.

Which of the following covenants are not included in a lease agreement? A.) Demise clause B.) Capacity to pay rent clause C.) Clear statement of term D.) Description of premise

B.) Capacity to pay rent clause

According to a recently enacted Minnesota Statute, the vendee (buyer) must record the contract for deed within how long of its execution or face a penalty? A.) One month B.) Four months C.) Six months D.) One year

B.) Four months

A contract for deed instrument includes all except A.) the principal parties. B.) the property disclosure. C.) the terms of sale. D.) default and remedies.

B.) the property disclosure.

What occurs when a option to buy is exercised? A.) A bilateral sale contract is created and only the seller is bound to perform. B.) A bilateral sale contract is created and only the buyer is bound to perform. C.) A bilateral sale contract is created and both parties are bound to perform. D.) No contract is enforceable and both parties are free from any and all sales contract provisions

C.) A bilateral sale contract is created and both parties are bound to perform.

What provision in an option agreement typically says the optionor is entitled to the consideration if the option term expires? A.) Property and title condition warranties B.) Option consideration C.) Forfeiture terms D.) Right of refusal

C.) Forfeiture terms

A contract for deed is also called a A.) green deed. B.) holder contract. C.) land contract. D.) closed deed.

C.) land contract.

Which of these items is not included in a lease agreement? A.) Use provisions B.) Demising clause C.) Description of premises D.) Alienation clause

D.) Alienation clause

An option to buy is A.) voidable. B.) a lateral agreement. C.) a dedicated contract. D.) a unilateral agreement.

D.) a unilateral agreement.

In a contract for deed the seller acts as a A.) lawyer. B.) landlord. C.) broker. D.) lender.

D.) lender.

What provision in an option agreement typically says the optionor is entitled to the consideration if the option term expires

Forfeiture terms

What does it mean if there are no limitations on the use of the property written into the lease

If no limitations are written into the lease, the tenant may use the property for any lawful purpose, providing the tenant does not violate any deed restrictions.

Explain the 'exclusive possession' condition in a lease agreement

The landlord must provide an irrevocable right to exclusive possession during the lease term, provided the tenant meets all obligations.

Capacity to Contract

The principal parties must be legally able to enter into the agreement; i.e., meet certain age, sanity, and other requirements. If not, the lease can be voided.

what is a declining credit option

This format allows progressively smaller portions of the option price to be counted toward the purchase, as the option period increases

A renter with a lease with option to buy can do what

accumulate down payment funds while paying rent to the landlord

Which of these items is not included in a lease agreement: - Use provisions - Demising clause - Description of premises - Alienation clause

alienation clause

A contract for deed is what type of agreement

bilateral

installment sales contract

bilateral agreement between buyer (vendee) and seller (vendor) in which the the vendor defers receipt of some or the entire purchase price of a property over a specified period of time

what is a lease

both an instrument of conveyance and a contract between principal parties to uphold certain covenants and obligations.

What happens if a tenant uses a property in a way that is legal but not permitted

constitutes grounds for default

in what contract section might you find the property address

description of the premises

what is the legal essence of a valid lease

it conveys an exclusive right to use and occupy a property for a limited period of time in exchange for rent and the return of the property after the lease term is over.

An installment sales contract can also be called all of the following except: - a contract for deed. - a land contract. - a purchase contract. - an agreement for deed.

land contract

a contract deed is attractive to

marginally qualified buyers

If a seller defaults by failing to deliver the deed the buyer may sue for all except - specific performance. - cancellation of the agreement. - mineral rights. - damages.

mineral rights

when is a lease for a period of more than one year enforceable

must be in writing to be enforceable

In a option-to-buy, which party is the potential seller

optionor

An installment sales contract can also be called all of the following except: - a contract for deed. - a land contract. -a purchase contract. - an agreement for deed.

purchase contract

In which contract provision would the length of the lease be outlined

rent clause

What clause in a lease stipulates the time, place, manner, and amount of rent payment

rent clause

What do we call the right of a person to have the first opportunity to purchase or lease a property

right of first refusal

What type of option agreement allows the optionee to add specific new parcels to the option contract as parcels already included in the contract

rolling option

What is a lease provision that gives the tenant the right to extend the lease for an additional period of time and sets forth the terms for the renewed lease

statement of terms

what happens to an unused option to buy

terminates at the expiration date

In a contract for deed who is responsible for home repairs

the buyer

what happens if the seller defaults by failing to deliver the deed

the buyer may sue for specific performance, for cancellation of the agreement, and damages.

_________________ governs the making, interpretation, and enforcement of leases

the law of contracts

a good agreement will include:

the option price, the option term, and land description, as well as incorporate all of the wording of the purchase contract that will become effective if the option is exercised

What is an important legal characteristic of an option to buy agreement

the optioned must perform if the optionee takes the option, but the optionee is under no obligation to do so

A contract for deed instrument includes all except: - the principal parties. - the property disclosure. - the terms of sale. - default and remedies.

the property disclosure

a contract deed does not include: - the principle parties - the property disclosure - terms of sale - default and remedy

the property disclosure

demising clause

this clause talks about how the landlord is leasing the property and the tenant is taking possession of the property.

Many areas have no standardized contract for deed or forms sanctioned by associations and agencies. Therefore, what is advised for all parties

to seek legal counsel

an option to buy clause is unilateral or lateral

unilateral agreement

In which provision would a landlord describe what activities can take place on the property

use of premises