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Lease-Options & Land

Contracts in Indiana

Lease-Options & Land Contracts are increasingly complex with

nuances that can easily lead to expensive mistakes for the ill-

informed. This e-Book addresses some of the essential but oft-

misunderstood concepts governing land contracts in Indiana. This e-

Book is written for landlords, real estate investors and property

management companies operating residential rental businesses.

this booklet are for informational purposes and are not legal advice, and may or may not reflect the most current legal developments in a particular area.

Transmission of the information is not intended to create an attorney-client relationship and is not intended to constitute legal advice or to substitute for

obtaining legal advice from an attorney licensed in your state. Nor is an attorney-client relationship established, merely by transmitting an inquiry, service

request, question or other information to us through our website or through email. If you are not a client of our law firm, information you transmit to us may

NOT be protected by the attorney-client privilege. GRIFFITH LAW GROUP LLC.





AnEssentialGuidebook

forRealEstateInvestors

andLandlordsinIndiana

Ane‐BookbyAttorney 

MatthewA.Griffith



GRIFFITH LAW GROUP

777 Beachway Drive, Suite 102

Indianapolis, IN 46224

317-663-0650

www.indybizlaw.com

LEASE‐OPTIONS&LANDCONTRACTS 2014



AdvertisingMaterial2

TABLEOFCONTENTS



CHAPTERSPAGE

1. ImportantBackgroundonLease‐Options  3

2. TwoTransactions,NotOne6

3. TheRightTenant.TheRightProperty.  11

4. ImportantDealTerms12

5. ExitStrategies14

6. ListofImportantDocuments16



Conclusion17

AbouttheAuthor18



LEASE‐OPTIONS&LANDCONTRACTS 2014



AdvertisingMaterial3

CHAPTER1

ImportantBackgroundonLease‐Options



WhyLandlordsNeedtoKnowtheHistory ofLease‐Options



Over the past several years, there have been many changes in the use and the courts’

treatment of lease‐options.Even state and local legislative bodies have begun to regulate

lease‐options.In Cincinnati, for example, there is now a

“predatory leasing” ordinance that

regulateslease‐optioncontracts.Georgia,asanotherexample,hasregulatedlease‐options by

state law, and more states are critically viewing leases with options as a form of needed

consumer protection.And, the rate of changes in the use and regulation of lease‐options is

accelerating.But

why?What’shappeningtolease‐options?



Inshort,realestateguru’staughtinvestorstoover‐useandabuselease‐options.Backinthe

late1990’s,residentiallandlords rarelyusedlease‐options.Itwasadifferentbree dofreal

estateinvestorwhousedlease‐options.Lease‐optionsweremorecommon

incommercialreal

estatedealsandfarmlandthantheywereinresidentialdeals.However,moreandmore

nationalandregionalrealestateinvestmentspeakersbeganadvocatinglease‐optionsfor

residentialproperties.BooksandtapesandCD‐ROMsfulloflease‐optionformsproliferatedin

number,andinvestorsbecomeveryaggressiveabout

howtostructurelease‐options.Largely

basedonbadadvicefromthesenationalandregionalspeakers,realestateinvestorsstarted

takingverylarge“downpayments”fromrenters.Investorswentto“bootcamps”and

seminars,andweretaughtthatlarge“downpayments,”coupledwithregularturnoverof

tenants,equatedtoa

sourceofsteadyincomeof“optionmoney,”muchlikemonthlyrent

paymentsthemselves.Evictionratesdidnotfall.Tothecontrary,landlordswereencouraged

toevicttenantsaftercollectingthoselar geoptionfees.Andso,tenantswhowerenot

qualifiedtobebuyerspaidbigbucksandsigned“rent‐to‐own”

contracts,onthepromiseof

homeownershipinthefuture.Later,thosetenantswereevicted,andnewtenantstooktheir

places,signednewlease‐options,andpaidmoreoptionfees.And,landlordslaughedallthe

waytothebank.



Noteveryoneandnoteveryla ndlordarelaughingtoday.Someof

thosetenants,who

eventuallylosttheir“downpayments,”filedlawsuitsandhavefoundsympatheticjudges.

Othersfoundtheirstatelegislators.And,sotheregulationoflease‐optionsbegan.Slowly

overthepastmanyyears,ithasbecomemoredifficultandprecarioustoofferatenanta

legitimateandfairlease‐

option.Toooften,becauselease‐optionsarenowbeingabusedand 

misusedonafrequentbas is,landlordscannotevicttenantsunderthelease,merelybecause

thereisalsoanoptionagreementbetweenthelandlord andtenant.



LEASE‐OPTIONS&LANDCONTRACTS 2014



AdvertisingMaterial4

Theproblemisthatthemanycourtsandsomestatelegis laturesarenowtreatinglease‐

optionsasiftheywerelandcontracts.And,inmoststates,landcontractsaretreatedasnotes

andmortgages,whichrequireenforcementofthestate’sforeclosurestatute,ratherthanthe

landlordseekingthequickerandless

expensiveevictionorforfeitureremedies.Thequestion

hasbecome:Doesthislease‐optionreallyconstitutealandcontract,andthusnoteand

mortgage?



LandContractsContrasted



Underalandcontract,thebuyerhaspossessionand

controlofyourproperty,anditisoftenexpensiveto

regainthatpossessionandcontrol.

Again,torepeat

thepoint,underanoldIndianaappellatedecision,

landcontractsaretreatedasnotesandmortgages,

whichrequiretheprosecutionofaforeclosureaction

andaforeclosuresale.Forfeiture,whichissimilartoanejectmentorevictionofatenant,may

notbeanavailableremedyagainst

thedefaultinglandcontractbuyer.Foreclosures,as

opposedtoforfeitures,areslowandexpensive.And,justbeforeyougetyourpropertyback

atthesheriff’ssale,thebuyermightfilebankruptcy,whichautomaticallystaystheforeclosure

sale.Inbankruptcy,aforfeitedlandcontractreceivesfarlessfavorabletreatmentthando

a

noteandmortgage.



Intheory,ourcourtsrequireforeclosure,ratherthanpermitforfeiture,asameansof

protectingabuyerwhohassubstantialequityinthesubjectrealestate.Therealityisusually

verydifferent.Usually,thebuyerdoesnothavesubstantialequityinthepropert y.Heonly

thinks

hedoes.And,thebuyerhasstoppedpayingthesellerbythetimealawsuitisfiled,

whichfurtherreducesthebuyer’sillusionary“equitycushion.”Addattorneys’fees,court

costsandsheriff’scoststotheequation, andthesellerusuallywillbeeligibletoseeka

deficiencyjudgment,evenaftergetting

thepropertybackafterthesheriff’ssale.



Yearsago,onesolutiontotheforfeiture‐foreclosureproblemwastosellpropertyusingalease

andanoptiontopurchase.Backinthe1990’s,therewasacleardistinctionbetweenlease‐

optionsandlandcontracts.Atruelease‐optionisactuallytwo

documentsrepresentingtwo

separatetransactions:(1)aleasewith(2)aseparateoptiontopurchase.Alandcontractis

one,singletransaction.



Lease‐OptionsOfferaWin‐WinScenario



Ingeneral,lease‐optionsenablealandlordtosellapropertyatapriceonthehighendoffair

market

valuetoabuyerwhopresentlydoesnotqualifyforthird‐partyfinancing,butwhois

In1973,theIndianaCourtofAppealsissued

adecisioninacasecalledSkendzelv.

Marshall,foreverchanginghowland

contractsandpoorlywrittenlease‐options

wouldbetreatedbyIndianacourts.Itisthis

appellatedecisionthatmakespoorly

writtenlease‐optionsdangerousfor

landlordsandpropertymanagers.

LEASE‐OPTIONS&LANDCONTRACTS 2014



AdvertisingMaterial5

likelytoqualifyforfinancingattheendoftheleaseterm(usually12to24months).The

landlordcanalsocollectanoptionfeeatthetimetheleaseissignedandadditionaloption

feesduringthelifeoftheoption.Theoptionfeescompensatethelandlordforkeepingthe



propertyoffthemarketduringtheoptiontermandimprovecashflow.Thetenantgains

accesstoapropertyworthpurchasing,re‐establisheshiscredit,andpre‐pays,essentially,a

partofthedownpayment.Thisgivesthetenantagoodreasonto remaincurrentonthelease

andclose

onthepurchase.



Becauseinvestorsareabusinglease‐options,thereisadefinitelyatrendforjudgestore‐write

lease‐optionsbytreatingthemlikelandcontracts,requiringforeclosureandnotpermittingan

eviction.Itishardtoimaginehavingtofileandprosecuteaforeclosurelawsuitinorderto



evictadeadbeattenant,butthathasbecomeareality,assomejudgesdecidetochangethe

lawandyourlease ‐optionagreements.



Onesolutiontothisproblemistoelectjudgeswhodonotaspiretobelegislatorsandwhoare

willingtohonoragreementsaswrittenbythe

parties.Thatisnotavery practicalsolution.A

morepracticalsolutionistoavoidgivingajudgegoodreasontore‐characterizeyourlease‐

optionaslandcontract.How?Herearesomesuggestions.



LEASE‐OPTIONS&LANDCONTRACTS 2014



AdvertisingMaterial6

EXAMPLE

If the property is worth $100,000 today and would be worth as much as $105,000 after

one year, the deal could be structured as follows:

 Lease for one year with rent equal to $900 per month (the market rent); and

 Option to be exercised during a 12-month period for a purchase price of

$100,000 at closing; an initial option fee of $1,000 and additional option fees of

$333.33 ($4,000.00 divided by 12 months) per month.

 Alternatively, option to be exercised during a 12-month period for a purchase

price of $103,000 at closing; an initial option fee of $2,000.

CHAPTER2

TwoTransactions,NotOne



A“lease‐option”isactuallytwotransactionsoccurringatornearthesametimebetweenthe

sameparties.Thefirstistheexecutionofa standardresidentiallease.Thesecondisthe

grantingtothetenantofaspecialoptiontopurchasethepropertyinthefuture.Thelandlord

does

notwanttolinktheleaseandoption,therebygivingacourtareasontotreatthelease‐

optionasonetransaction.So,theguidelinesandsuggestionsthatfollow largelyaddressthe

mistakeoflinking,inanyway,theleasetotheoption.Themoretheleaseandtheoption

are

linked,thegreaterthechancethatacourtwillviewthedocumentsasevidencingone

transaction,namelyalandcontract.



TheBasics



Thelandlordshouldrequireaninitialoptionfeefortheoption,whichisinadditiontoany

securitydepositorfirstmonth’srent.Themonthlyrentshould

beequaltothefairmarket

rent;however,thelandlordshouldchargeanadditionaloptionfee,payableinonelumpsum

ormonthly.Theoptionfee,ifpaidmonthly,shouldbepaidbyseparatecheckthantherent

check.



Thetotaloftheadditionaloptionfeesshouldbeaboutthesame

asthediscountgivenfrom



thefuturefairmarketvalueofthepropertyatclosing,orsomeotheramountcalculatedto

compensatethelandlordforremovingthepropertyfromthemarketduringtheoptionperiod.

Thiswillleave thelandlordinf inanciallythesamepositionasifthepropertywere

soldatthe

endoftheleasetoathirdpartyatfairmarketvalue,butprovidesanincentivetothetenant

nottodefaultundertheleaseandtokeepthepropertyingoodrepair.



LEASE‐OPTIONS&LANDCONTRACTS 2014



AdvertisingMaterial7

Inthepast,thelandlordmightgivethetenantarentcredit

equaltoaportionofthemonthlyoptionfees.Inowlonger

advocatethatapproach.Why?Becauseitcreatesanother

linkbetweentheleaseandtheoption.Inanycase,ifthe

tenantdoesnotpurchasetheproperty

thenalloptionfees

areforfeited.



UseSeparateDocuments



Acommonmistakeistomergethelease,theoption,and

thepurchaseagreementintothesame“short”form.This

canbeextremelydangerousforthelandlord,becauseit

allowsthetenant(orworse,acourt)tointerprettheleaseasa

landcontractorpurchase

agreement,andthusdelayorpreventevictionbydemandingforeclosure. Theseproblems

oftenariseinthetenant’sbankruptcy.



Theoptionshouldeitherincludethetermsofthepurchaseorincorporatebyre ferencea

separateattachedpurchaseagreement.Mypreferenceforlandlordsisthattheoption

agreement

beshortandthatapurchaseagreementbeattached.Donotrefertotheoptionor

thepurchaseitselfinthelease.Thepurchaseagreementwouldnotbesigned,however,until

theoptionisexercisedbythetenant.Thepurchaseagreementshouldbefullynegotiatedwith

allitsprovisionscompleted.Only

theleaseandoptionagreementshouldbefullyexecuted

(signed)attheinitialdocumentclosing.Theattachedpurchaseagreementisnotsigned,

becausethetenanthasnotexercisedtheoptionandhasnotagreedtopurchasetheproperty.

Later,whentheoptionisexercised,thepurchaseagreementissignedand

servestoreplace

theoptionagreement.



Ifthelandlordisalsogoingtobefinancingthetenant’spurchaseoftheproperty,thenattach

unsignedformsofthewarrant ydeed,noteandmortgagetothepurchaseagreement.You

shouldalsoconsiderusinglead‐basedpaintformsanddisclosureswhenthelease

issigned.

However,thestate‐requiredSeller’sResidentialRealEstateSalesDisclosureformsshouldnot

becompletedorsignedatthetimetheleaseandoptionaresigned.Why?Becausethatis

evidencethattheentiretransactionisreallyasaledisguisedasalease‐option. Whenthe

optionisexercised

andthepurchaseagreementisactuallysigned,thentherealestate

disclosureformcanbesignedanddatedthesamedateasisthepurchaseagreement.



OtherTimingConsiderations



Iusedtoadvocatesigningtheleaseandtheoptionagreementatthesametime.Thisareaof

thelawis

changing,andsotoomustsoundbusinesspracticeschangetotrackthechangesin

IMPORTANTWARNING:The

optionissignedearly,anytime

aftertheleaseisinplace,but

thepurchaseagreement

attachedtotheoptionisNOT

signeduntilthetenanthas

exercisedtheoptionandis

readytobuythehouse.

LEASE‐OPTIONS&LANDCONTRACTS 2014



AdvertisingMaterial8

thelaw.Now,Iprefertosignanddatetheoptionagreementmonthsaftertheleaseissigned.

InowtelltenantsthatIwillnego tiatewiththemthetermsofanoptionagreement,under

certainconditions:1)thetenantmustpayallrentontime,2)thetenantmustshow

effortsto

removeanybadcreditmarksonthetenant’screditreport,3)thetenantmustactivelywork

withamortgagebrokerinanefforttoobtainfinancingorpre‐approval,and4)thetenant

cannototherwisebreachthelease.Then,ifalltheseconditions arebeingmetovera

periodof

fourtosixmonths,subjecttomysoleapproval,then

Iwillnegotiatethetermsofafairoptionagreement.

Usingthisprocedure,therearefourtosixmonths

separatingmyleaseandmyoptionagreement.

Additionally,IknowthatIhaveaseriouspotential

buyerwhoreallywants

tocleanuphercredit,obtain

financing,takegoodcareofmyproperty,andwill

likelygetfinancingtocloseonthepurchaseofmy

building.Ihaveimprovedmylegalposition,inthe

eventIhavetoevictthetenant,andIhaveimproved

thechancesthatmytenant

willcloseonthe

purchase.



LanguageIsImportant



Usegoodlegalforms.Donotsimplyusetheformsyoupurchasedfromanon‐lawyer,national

speaker,orfromtheofficesupplystore.Useprofessionally‐writtenlegalforms.Inother

words,NEVERusealegalform,unlessyourlegaladviserwroteit,

fixeditorapprovedit.



Myfirstlease‐optionlawsuitforaclientwasa

bankruptcycase,inwhichthelandlord‐client

hadhistenantssignaone‐page“Rent to

Own”form.Thefactswerenotinmyfavor,

andwesettledthecase.Therewasverylittle

that

wasdonewellinthat“RenttoOwn”

form.Theproblemsstartedwiththetitleof

theagreement:“RenttoOwn.”Thiswas

reallyaleaseandpurchaseagreementand

optionallrolledintoonedocument.The

formusedtheterm“downpayment,”rather

than“optionfee.”Thelandlordwas

called

the“seller.”Thetenantwascalledthe

“buyer.”Theentiredocumentwaslitteredwithlanguagesuggestingthatthetenantwas

purchasingtheproperty.And,thatlanguagesuggestedalandcontract,ratherthanalease

LEASE‐OPTIONS&LANDCONTRACTS 2014



AdvertisingMaterial9

withaseparateoptionagreement.There’sanexpressioninmyprofession:“Badfactsmake

badlaw.”Inotherwords,relativetolease‐options,ifyouusebadlegalforms,youmightgeta

badresultincourt.Don’tbecheap‐buygoodlegalformsfromaknowledgeableattorneywho

understandslease

‐options.



Sincemyfirstlease‐optionlawsuit,Ihavehandleddozensupondozensofsimilardisputes.

Unfortunately,thelegalformssoldbyregionalandnationalspeakersarestillbeingused,and

thoseformsstillcontainbaddraftsmanshipandpoorlychosenlanguage.Intheend,poorly

draftedlegalformscancause

badresultsandsignificantfinanciallossesfortherealestate

investor.Ifyoudonothavelease‐optionforms,callyourrealestateattorneyandgethis

forms.Ifyoualreadyhaveforms,haveyourrealestateattorneyreviewandcorrec tthem.

Andrememberthatnoteveryattorneyfullyunderstands

lease‐optionsandtherecent

developmentsinthisareaofthelaw.Picktherightattorney, orbepreparedtoeducateyour

attorneyaboutlease‐options.Howeveryoudoit,makesurethatyourlegalformsareingood

orderandcontaintheappropriatelanguage.



MultipleChecks



Thelandlordshouldcollectmultiplechecks,each

checkrepresentingadifferentobligationundera

differentagreement.Inotherwords,thetenant

willpaythefirstmonth’srent,asecuritydeposit

(sometimescalledlastmonth’srent),anoption

feeormonthlyoptionfees,and,oncetheoption

isexercised,aseparate

downpaymentorescrow

payment.Eachofthesepaymentsismadeat

differenttimes,underthedifferentagreements:

thelease,theoptionagreement,andthe

purchaseagreement,respectively.Thememoportionofeachcheckshoulddescribethe

natureofthepayment:“securitydeposit”or“downpayment”or“optionfee.”



Bycollecting

differentchecksatdifferenttimes,thelandlordismakingitclearthatthereare

separateagreements,notasingletransactionthatlookslikealandcontract.



TheOptionFeeAmount



Manyinvestorsaregettingbadadviceabouttheamountofoptionfeestochargeatenant.

Theoptionfeeis

supposedtocompensatethelandlordforkeepingthepropertyoffthe

marketduringtheoptionterm.Anoptionagreementisnotalicensetocheatandstealfrom

tenantswhoarehopingtobuyahome.Yet,moreandmoreinvestorsaretakingever‐bigger

LEASE‐OPTIONS&LANDCONTRACTS 2014



AdvertisingMaterial10

EXAMPLE

If you would have normally charged $4,000 as an option fee, consider charging $1,600 as the option

fee, increase the rent by $100 per month and raise the purchase price by $1,200. If the tenant does

not exercise the option, your profits will be $1,200 less than the $4,000 you had hoped to get.

However, by using this technique, you significantly increase your chances of avoiding an expensive

foreclosure case, in the event the tenant fights the eviction and the judge decides to re-write your

contract.

optionfeesfromtenants.Thesehugeoptionfeesmorethancompensatethelandlordfor

keepingthepropertyoffthemarketduringtheoptionterm.Thesebigoptionfeeslooklike

downpaymentstothecourts.Frankly,thesebigoptionfeeslooklikedownpaymentstome,

andIamapro

‐landlordattorney.



Thereasonsomejudgesaretreatingleas e‐optionsaslandcontractsisbecausethetenant‐

buyerisbelievedtohavesubstantialequityintheproperty.Judgestendtobefairandtryto

rightwrongs.



Thesejudgesperceivethatthetenantisbeingcheatedoutofsubstantialequity.

So,structure

yourlease‐optionsinawaythatmakesitdifficultforajudgetofindthat thetenantwilllose

meaningfulequityinaneviction.Thereisasimplewaytoaccomplishthistask.Increasethe

purchasepriceortherent,dollarfordo llar,bytheamountthat

youlowertheoptionfee.



Howbigisanoptionfeethathasbecometoobig?Thatdependsonseveralfactors.Whatis

thepropertyworthtoday?Whatwillthepropertybeworthattheendoftheoptionperiod?

Whatistheappreciationrateinthearea?Howgoodor

badisthetenant’scredit?Whatare

theotherriskstothelandlord? Howlongistheoptionperiod?Byansweringthesequestions

andkeepinginmindthatoptionfeesareintendedtocompensatethelandlordforkeeping the

propertyoffthemarketduringtheoptionterm,thewell‐advised

investorcandetermineafair

optionfeethatdoesnotlooklikeadownpayment.



Asafinalthought,rememberthatpre‐paymentofthelastmonth’srentoranyamountgreater

thanthefirstmonth’srentwillbeconsideredasecuritydepositunderIndiana’s45‐DayLetter

Rule.Make

suretotreatsecuritydepositsassecuritydeposits,evenifyoucallthem

somethingelse.



LEASE‐OPTIONS&LANDCONTRACTS 2014



AdvertisingMaterial11

CHAPTER3

TheRightTenant.TheRightProperty.



TheTenant/BuyerShouldBeBetterThanTheTypicalTenant



 Thetenant/buyershouldbemorecredit‐worthythanatypicaltenantandshouldhavea

strongdesiretopurchasetheproperty.Thelandlord/sellershouldhaveadesiretosellthe

propertyinthenearfuture.Thetenant’sincomeneedsto

behighertosupporttheadditional

optionfeesandthetenantwillpaymorecashupfront.Also,thetenantshouldberequiredto

performmoreoftheregularmaintenanceandrepairdutiesthanatypicaltenant. However,

donotexpectthetenant/buyerto keephis/herpromisestomaintaintheproperty.

You

shouldinspectthepropertyregularly.



PickingtheRightProperty



Noteverypropertyisagoodlease‐optionproperty.Intheexampleabove,thehousehada

fairmarketvalueof$100,000.Howaboutamoreexpensivehouse?Canyouoptiona

$380,000house?Yes,butmosttenantswhocan

affordtobuya$380,000homecanobtain

typicalfinancing.Themarketfor$380,000lease‐optionsisrathernarrow.Howabouta

$40,000home?Thatmarketmightevenbenarrowerthanthe$380,000housemarket.Why?

Becausetherearefewtenantswithgood‐payingjobsandgoodcreditwhowould

wanttolive

ina$40,000house,andthatsegmentofthemortgagelendingindustryhasshrunk,makingita

challengetogetthetenant‐buyerfinanced.Thebestmarkettosellpropertiesusinglease‐

optionsissomewherebetweenthe$70,000houseandthe$350,000house.Youshouldgive

seriousthought

totheappropriatenessofsellingbylease‐optiononapropertybyproperty

basis,andtenantbytenantbasis.Inshort,thedealmustmakesenseandbelikelytoclose.



LEASE‐OPTIONS&LANDCONTRACTS 2014



AdvertisingMaterial12

CHAPTER4

ImportantDealTerms



TheLengthoftheOptionTerm/Period



Youneedtogiveyourtenanttimetorepairhercreditandobtainfinancing.Thattakes12

monthsorlongerinmostcases.Ontheotherhand,youdonotwanttokeepyourproperty

offthemarketfortwo yearsorlonger.A

longeroptionperiodsuggeststhatthetenantis

buyingthepropertyovertime.Again,alease‐optionlooksmorelikealand contract,ifthe

optionperiodisverylong.Ipreferanoptionperiodof12to18months.Ifyouwantto renew

theoptionperiodafter18

months,thennegotiateanextension,signnewagreements,and

collectanotheroptionfee.



NoPublicNoticeoftheOption



Theholderofanoptiontopurchaserealestatedoesnotownaninterestinthepropertyitself,

butmerelyholdsacontractrighttoforcethesellerto conveythe

propertytotheholderofthe

optionaccordingtothetermssetforthintheoption.Thatisthefundamentaldifference

betweenalease‐optionandalandcontract.Thus,theoptionshouldneverberecordedand,if

thetenant/buyerdefaultsonthelease,theoptionshouldnotbediscussedin

theevictionor

damagesproceedings.Theoptionshallexpresslystatethatitmaynotberecorded.



ClosetheSaleasSoonasPossible



Apotentiallydangeroustimeforthelandlordarisesafter

thetenanthasdeliverednoticeofexercisingtheoption

andbeforetheclosing.Thisisbecausethetenant



acquiresaninterestinthepropertybyexercisingthe

optionbutissupposedtocontinuepayingrentuntilthe

closing.Anydefaultundertheleaseatthistimemaynot

besufficienttoterminatetheoptionrightsunlessthe

documentationofthetransactionisclear.Thelastthing

thelandlord

wantsistobeforcedintoasuperioror

circuitcourt,asopposedtoasmallclaimscourt,toforecloseorforfeitatenantwhohaspaid

onlytheoptionfees,isnolongerpayinganyrent,andisunwillingorunabletocloseonthe

purchase.Onepossiblesolutionto

thisproblemistoincludelanguageintheoptionindicating

thattheoptioncannotbeexercisedorisvoidedautomaticallyintheeventofanydefault

underthelease.



LEASE‐OPTIONS&LANDCONTRACTS 2014

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AdvertisingMaterial13

“As soon as a client must file a

lawsuit, the client has lost.”

NoticeofDefault&TerminationofOption

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Whenthetenantbreachesthelease,thelandlordhastherighttoterminatetheoption.That

isdonebythelandlordsendingnoticetothetenantthatthelandlordhasterminatedthe

option.Mostlandlordsfailtodosendnotice,creatinganissueto

debatebeforeajudgelater.

OneofmyoldlawpartnershasasayingthatringstrueeverytimeIfilealawsuit.Hesays:“As

soonasaclientmustfilealawsuit,theclienthaslost.”Lawsuitsarea wasteoftime,money,

effort,energy,opportunity,etc.

Onekeytomakingmoneyinbus inessistomakeeverydeala

success.Win‐Winscenariosarealwaysbetterthanwin‐loserelationships.Anotherrelated

keytobusinesssuccessistoavoidexpensivedisputes.

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Applyingthoseprinciplestolease‐options,itis

importantthatthelandlorddocumenthis

intentions

astoanoptionagreementwhenevera

tenantbreachesalease. Ifa tenantisafewdays

lateonrent,thatisabreach,andthelandlord

shouldsendalettertothetenantindicating thatthelandlordhasterminatedtheoption,oris

willingtowaivethedefaultas

totheoptionthattime.Iftheleaseoroptionagreement

requiresawrittennoticefromthelandlordtothetenantinordertoterminateeitherthelease

ortheoption,thenthelandlordmustmakesuretofollowtherequirementsofthewritten

agreements.Somanylandlordsfailto

followtheirownagreements.Yet,itissoveryeasyto

sendaletterorotherwrittennoticetothetenantandavoidanyproblemsintheprocess.

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LEASE‐OPTIONS&LANDCONTRACTS 2014

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AdvertisingMaterial14

CHAPTER5

ExitStrategies

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ExitStrategiesandCreditProblems

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Thetransactiondocumentsshoulddescribewhatwillhappenifthetenantdefaultsonthe

lease,failstoexercisetheoption,orisunwillingor unabletocloseonthepurchaseafter

exercisingtheoption.Ifthetenantistousebankfinancing,thengenerallythe

optionfeeswill

beforfeitedtothelandlordifthetenantdoesnotcloseonthepurchaseforanyreason.

However,ifthelandlordisprovidingthefinancing,anothercreditreportshouldberequired

immediatelypriortoclosingasaconditi on ofthefinancing.Ifthetenantthendoesnothave

goodcredit,thelandlordmusthavetherighttorefusetoprovidethefinancing.Ifthedeal

thendoesnot

closebecausethetenantisunabletofindotherfinancing,thetenantislikelyto

beveryupsetunlessthetenantclearlyunderstoodtherisks.Ofcourse,thereisnothingto

preventthelandlordandtenantfromnegotiatinganewdealiftheoldonedoesnotclose.

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SmallClaimsCourt

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Indianasmallclaimscourtshavelimitedjurisdiction,meaningthatthesecourtscanonlydo

certainthingsandhearcertaincases.AsofJanuary2014,Indianasmallclaimscourtsare

limited

totwotypesofcases:landlord‐tenantdisputesandcasesinvolvingdisputesof$6,000

orless.MarionCountySmallClaimsCourtshavejurisdictionovercasesinvolving$6,000or

less,exclusiveofattorneys’fees.

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Indianasmallclaimscourtscannotorder

foreclosure.So,ifalease‐optiondisputeis

viewedbyasmallclaimscourtjudgeasaland

contractcaserequiringforeclosure,thecasemust

betransferredtoanothercourt.Thatresultsina

delayintheevictionofmonthsorpossiblyyears.

In

MarionCounty,somesmallclaimscourtjudges

refusetohearanylandlord‐tenantcase,ifthere

isanoptionagreementbetweentheparties.

Thosecasesautomaticallyaredelayedandget

senttotheMarionSuperiorCourt,wherethe

courtrulesaremorecomplicatedandalawyerisusuallyrequiredtorepresent

thelandlord.

Thisisjustanotherreasonwhyitissoimportantproperlytostructurelease‐options.

LEASE‐OPTIONS&LANDCONTRACTS 2014

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AdvertisingMaterial15

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“SweatEquity”SideDeals

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Often,landlordswillsignlease‐optionagreementswithtenants,expecting thetenanttomake

significantrepairsaspartofthetenant’s“down‐payment.”Thatapproachcausesseveral

problems.First,makingrepairstoabuildingdonotneatlyfitintoaleaseoroption

agreement.Secondly,that

isataxabletransaction,andthefailuretoreportthattransactionis

taxevasion.Thirdly,landlordsdonotproperlydocumentthattenant’sagreementtomake

repairs.Fourthly,these“sweat‐equity”dealslookmorelikepurchaseterms,ratherthan

leases.Inshort,thesedealsareusuallyamessandrarelydocumentedproperly.

Avoid

“sweat‐equity”deals,andseekhelpfromanattorneyifyouinsistondoingsuchadeal.

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LEASE‐OPTIONS&LANDCONTRACTS 2014

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AdvertisingMaterial16

CHAPTER6

ListofImportantDocuments

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Thefollowingisashortdocumentchecklist,whichalandlord/sellermayfinduseful:

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LeaseApplication

CreditReports/TenantScreeningReports

EmploymentVerification

BankVerification

LeaseSecurityDeposit

Lead‐basedPaintDisclosure

Lead‐basedPaintBooklet

Seller’sResidentialRealEstateSalesDisclosure

OptiontoPurchase

SamplePurchaseAgreement

SampleWarrantyDeed

*Sample

Note(unsigned)

*SampleMortgage

NoticebyTenantofExerciseofOptiontoPurchase

*SecondCreditReport

Titleinsurancecommitment

NoticebyOwnerofChangesinPropertyCondition

Appraisals,inspectionreports,etc.,asrequiredbylender

SettlementStatement

SignedandrecordedDeed

*SignedNote

*SignedMortgage

DisclosureofSalesInformation

Record

Deedand*Mortgage

*Mortgagee’sTitlePolicy

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(*usedwhenlandlordisprovidingfinancingtotenant)

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LEASE‐OPTIONS&LANDCONTRACTS 2014

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AdvertisingMaterial17

Conclusion

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Ingeneral,lease‐optionscanenablealandlordtosellapropertyatapriceonthehighendof

fairmarketvaluetoa buyerwhopresentlydoesnotqualifyforthirdpartyfinancingbutis

likelytoqualifyaftertheendoftheleaseterm.Thelandlordcan

alsocollectanoptionfeeat

thetimetheleaseissignedandadditionaloptionfeesduringthelifeoftheoption.Theoption

feescompensatethelandlordforkeepingthepropertyoffthemarketduringtheoptionterm

andimprovecashflow.Thetenantgainsaccesstoapropertyworth

purchasingandprepays,

essentially,apartofthedownpayment.Thisgivesthetenantagoodreasontoremain

currentontheleaseandcloseonthepurchase.



Itwouldbeashame,iflargenumbersofpoorlywrittenlease‐optionsinfluencedthecourtsto

treateverylease‐optionagreement

asalandcontractandthus,anoteandmortgage,because

thatharmsbothlandlordsandtheirtenant‐buyers.So,Iencouragealllandlordscarefullyto

reconsiderhowtheydrafttheirlease‐options. 



Intheend,lease‐optionsremainagreatwaytosellrealestate.Lease‐options,ifstructured

andwrittenproperlyandfairly,areawin‐winbothforthetenant ‐buyerandlandlord‐seller.

Byavoidingunfairorpoorlease‐optionstructuresandstrategies,lease‐optionscanstillbea

greatwaytosellrealestateandgiveatenantwithbadcredittheopportunityforhome

ownership.

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Aswithanycomplicatedtransaction,changesinthefactsandcircumstancesofacasewill

causetheneedtoalterstandardformdocuments,sobealerttoopportunitiesandissues.As

always,feelfreetocontactthisauthorforspecificanswerstoyourquestionsorfora

consultation.Goodluck

andHappyRealEstateInvesting.

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LEASE‐OPTIONS&LANDCONTRACTS 2014

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AbouttheAuthor

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MatthewA.Griffith,SeniorAttorney

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MattisthefounderandSeniorAttorneyatGriffithLawGroup

LLC,anIndianapolislawfirm.Hefocuseshispracticeon

business,realestateandestateplannermatters.Matt’s

practiceemphasizespracticalsolutionsthatarepreventativein

natureandthatservetomaximizehisclients’opportunities,

whileminimizingrisks.

Herepresents

businessowners,solopreneurs,executivesand

professionalsinawidevarietyofplanning,growth,

transactionalandcorporatematters.Hisrealestateclients

includeresidentialandcommercialinvestors,developers,builders,contractors,brokers,

propertymanagersandbuildingtrades.

Mattroutinelycounselsclientsinrealestatematters,businessformations,financing,risk

assessmentandminimization,

businesstransactions,employmentagreements,buy‐selland

confidentialityagreements,businesssuccessionplans,disputeresolution,andproductsales

anddistributionarrangements.

Mattisanentrepreneur,investorandbusinessownerhimself.Thoseexperiencesenablehim

withauniqueperspectivetoidentifyandservetheneedsofhisbusinessandrealestate

clients.Matt

providesexecutivecoachingservicesaswellasgeneralbusinesscounseltoa

widerangeofbusinessownersandtheircompanies.

Ifyouhavequestionsaboutthesematerials,feelfreetocontactMattby:

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Email: [email protected]

Phone: (317)663‐0650ext.102

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www.indybizlaw.com