With the market shifting once again, buyers may require a lease period before purchasing a property. There are different ways to accomplish the goal of ownership through leasing, the Lease-Purchase Agreement and the Option to Buy a Leased Property.
There are a number of reasons why a Lease-Purchase might work well for a potential buyer. A rising interest rate may have knocked a buyer out of qualification, the buyer may not have the funds to close immediately or the buyer may need to rehabilitate credit. If the buyers anticipate that they will be able to purchase the property within some defined period of time, a Lease Purchase might be the answer.
The GAR Lease-Purchase Agreement is not the same thing as an option to purchase a leased property. The lease-purchase includes a closing is on a predetermined date. It is not optional. If the tenant/buyer does not close, the tenant/buyer is in breach of the purchase portion of the agreement.
The GAR documents to be used in a Lease Purchase are:
F201 Purchase and Sale Agreement
F207 Lease Purchase and Sale Exhibit
F916 Lease for Lease/Purchase Agreement Exhibit
There are differences between a regular Purchase and Sale Agreement and a Lease-Purchase Agreement.
Negotiated contracts can get messy. There may be multiple documents, an offer and a counteroffer, or the original offer may have multiple strike throughs and insertions. Buyers, sellers and lenders may want a “clean” or conformed copy of the final terms for ease of knowing the final terms. The purpose of the conformed contract is to create a legible version of the original agreement.
The Terms of the Original Contract Should Not Change.
A conformed contract is just a clean version of a valid, fully executed contract and should not change any of the terms of the contract. The date on the conformed contract should not change. It should be the same date as on the original contract, even though it is signed at a later date.
If one party refuses to sign the conformed contract, the parties would still have a binding agreement so long as the original contract was signed by the parties and delivered back to the party making the last offer.
Assignment to a new party of the purchase agreement rights of a buyer is common in both residential and commercial real estate contracts. As previously noted in broker corner articles, the LLC form of ownership offers a number of advantages to owners of investment properties, including limiting the liability of the members.
The majority of assignments are to LLCs to hold specific property for the express purpose of limiting liability. The specific LLC has usually not been created at the time of the purchase, so assignment is the easiest way to transfer the contract to the new legal entity. This is true for both small investors and large investors in both residential and commercial purchase agreements.
Watch out. Assignments to newly formed LLCs can be for a legitimate purpose and perfectly legal. On the other hand, they can be a part of a money laundering scheme. It is very important for the closing attorney to review assignment and LLC documents closely to confirm the assignee’s status.
A limited liability company (LLC) is a business structure that protects its owners from personal responsibility for its activities, including its debts or liabilities. Protection from personal responsibility is the most significant advantage of creating an LLC. An LLC can have a single owner (member) or can have multiple owners (members).
LLCs are hybrid entities offer unique advantages to its members. They combine the characteristics of a corporation with those of a partnership or sole proprietorship. LLCs are easier and cheaper to form than corporations while limiting the liability of the owners more than a partnership would. Its Owners are called Members, rather than partners or shareholders.
The limited liability feature of LLCs make LLCs very attractive to investors of real estate, as well as many other business ventures. In fact, the LLC is the most common form of business entity in Georgia.
Does A Listing Agent Have to Present Subsequent Offers After an Offer to PurchaseHas Been Accepted by the Seller?
A listing broker’s duties to the seller are enumerated in the Seller Brokerage Engagement Agreement. Among other duties, there is a clearly defined duty to timely present all offers to and from the Seller, even when Property is subject to a Contract to Sell. (F101 Seller Brokerage Engagement Agreement Section 7.(a)(2).
The obligation to present all offers, even after the property is subject to an offer to sell, is also included in the Code of Ethics Article 1 Duties to Clients and Customers.
Standard of Practice 1-7. When acting as listing brokers, REALTORS® shall continue to submit to the seller/landlord all offers and counter-offers until closing or execution of a lease unless the seller/landlord has waived this obligation in writing. Upon the written request of a cooperating broker who submits an offer to the listing broker, the listing broker shall provide, as soon as practical, a written affirmation to the cooperating broker stating that the offer has been submitted to the seller/landlord, or a written notification that the seller/landlord has waived the obligation to have the offer presented.
The only way the listing agent is relieved of this obligation is if the seller has waived the obligation in writing.
The market has shifted. Multiple offers have slowed down, but sellers still want the best price for their property. In an effort to increase prices, sellers may ask their agents to reveal the terms of competing offers to the prospects. This is called “shopping an offer.”
Here’s an example. Even though their neighbors got 9 offers 6 months ago with no contingencies, no inspections and huge escalation clauses, their listing has produced only (!) 3 in 2 weeks. And the lowest price has the best terms – cash and a quick closing. The seller wants cash and a quick closing, if only that offer was as high as the best price. The seller instructs his listing agent to reveal the price of the highest offer to the buyer he wants in an effort to get that buyer to increase the price. Can the listing agent do that? Can the seller do that? Is it legal?
Under Georgia law, a fiduciary duty exists whenever a person places the highest level of confidence or trust in another person regarding a particular transaction or in financial affairs and the other party accepts that confidence or trust. That is, a fiduciary owes the highest duty to its clients.
Brokers in Georgia do not owe a fiduciary duty to clients. The law on fiduciary duty changed in the early 1990s with the introduction of the Brokerage Relationships in Real Estate Transactions Act, O.C.G.A. §10-6A-1 et seq.; (BRETTA). BRRETA, states as follows:
A broker who performs brokerage services for a client or customer shall owe the client or customer only the duties and obligations set forth in this chapter, unless the parties expressly agree otherwise in a writing signed by the parties. A broker shall not be deemed to have a fiduciary relationship with any party or fiduciary obligations to any party but shall only be responsible for exercising reasonable care in the discharge of its specified duties as provided in this chapter and, in the case of a client, as specified in the brokerage engagement.
The GAR Listing Engagement Agreement and the GAR Buyer Brokerage Agreement are consistent with BRETTA and do not impose fiduciary duties upon the broker when acting in a brokerage capacity. That’s tremendous protection for brokers. Since the introduction of BRETTA, the frequency of lawsuits in Georgia based on a realtor’s breach of duty has dropped significantly. In other parts of the country, licensees do owe fiduciary duties to clients and the liability of those brokers remains high.
The Brokerage Relationships in Real Estate Transactions Act (BRRETA) requires licensed agents in Georgia to provide to buyers material adverse facts or defects pertaining to the physical condition of the property that could not be observed by routine inspection.
Sellers, unless they are licensed agents, are not similarly required under BRETTA. There is no corresponding statute or legislation governing the conduct of an unlicensed seller. However, under Georgia case law, a seller does have a duty to disclose defects in the property that the seller knew about or should have known and that a buyer would not have observed upon a reasonably diligent inspection of the property. If a defect is discovered that a seller should have disclosed, the seller can be sued in a civil action for fraud.
There are 4 basic elements that must be proved in a case for fraud for non-disclosure.
Why do we require the Lead Based Paint Disclosure (LBP)?
The LBP is required by a federal law written in 1992 to protect purchasers and renters against exposure to lead based paint. The act is called the Residential Lead-Based Paint Hazard Reduction Act of 1992, also known as Title X (“Act”).
What housing is required to have an LBP?
Housing that was built prior to 1978, whether it is for sale or for rent. There are 2 different GAR disclosures tailored for each situation. For sales, it is GAR F316. For rentals, it is GAR F918. If you are using RE forms, the LBP disclosure form is RE 140 and the LBP pamphlet is RE 141.
Do fixtures manufactured or painted prior to 1978 require an LBP?
Yes, the Act includes lead-based paint hazards. A “LBP hazard” includes fixtures that may have been manufactured or painted prior to 1978, even if the property itself was built in 1978 or later. Consider includes antique doors, antique light fixtures or any other elements in the property that may have been created prior to 1978. If in doubt, disclose.
When must LBP disclosures be made?
The LBP disclosure of known information on lead-based paint and lead-based paint hazards before the binding date of contracts and leases.
What if a LBP disclosure is not in compliance with the federal law?
The Act carries huge fines for violations. Each violation carries a fine from $11,000 to $16,0000. Each disclosure has multiple sections that need completion. Assume that investigators from the EPA are here in Georgia, spot checking for violations. Because they are here.
What is Required and When?
A buyer’s right to inspect is covered in the GAR Purchase and Sale Agreement (PSA) in Section 8, page 3, Inspection and Due Diligence. It is also included in the Temporary Occupancy Agreement (TOA).
The GAR Purchase and Sale Agreement allows buyers or their agents to enter the seller’s property to inspect, both during due diligence and after due diligence, right up until the day of closing. Frequent, extended or unscheduled inspections can create friction between the parties. Communication, cooperation and courtesy can win the day.
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