Lease-Purchase Agreements and Options to Buy a Leased Property

​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.
 
Lease-Purchase Agreement
 
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. 

 

1. In a Lease-Purchase, both a security deposit and Earnest Money may be required.  They are disbursed differently.  A security deposit is returned to the tenant if the lease ends without damage or outstanding rent or other costs.  Earnest money, on the other hand, is disbursed according to the terms of the purchase agreement.  If the buyer defaults, earnest money is forfeited to the seller.  If the purchase is closed, the earnest money is applied to the purchase price.
2. Rental Credit. A lease-purchase agreement can include a stipulation allowing a portion of each month’s rent to become additional earnest money. This creates a financial incentive for the tenant to complete the purchase portion of the lease-purchase transaction.  Most lenders will not allow lease payments in excess of the market rent to be applied to the purchase price.  That’s why the GAR Rental Credit Provision is included in the Lease-Purchase and Sale Exhibit (F207). 
3. The GAR Lease for Lease/Purchase Agreement Exhibit (F916) provides that the term of the lease ends at the closing of the purchase of the property pursuant to the Lease/Purchase Agreement.  They should be the same date.

 
The lease itself is generally the same as a standard lease. The tenant has the same obligations under the GAR Lease for Lease/Purchase and the standard GAR Lease. There is a Move-In Agreement. The landlord must, within a reasonable time, repair identified defects and any other defects that, if not corrected, would leave the property in a state of disrepair. Just as in a standard lease, the tenant/buyer is prohibited from making any alterations, modifications, or improvements to the property (including painting) without first obtaining prior written consent of the landlord. If the landlord consents, any improvements, alterations, or modifications will be deemed to be for the sole benefit of the tenant. As such, the tenant expressly waives all rights to recover the cost or value of the same. Any improvements, alterations, or modifications of the property made by the tenant without the approval of the landlord will be considered damage done to the property by the tenant.
 
Failure to Close
If the tenant/buyer fails to close on the date specified in the GAR Lease/Purchase Agreement, the GAR Lease for Lease/Purchase Agreement terminates and the tenant must vacate the property. However, if the landlord wants to continue to allow the tenant to remain on and lease the property despite the termination of the purchase agreement, the parties should enter into a normal lease agreement using the GAR Lease for Residential Property (Not to Be Used for Lease/Purchase Transactions) form.
 
Lease with an Option to Purchase
An Option Agreement to purchase is different from a Lease Purchase Agreement.  The tenant is not obligated to buy the property.  The Option Agreement to Purchase Leased Property would be an exhibit to the lease agreement.
 
The GAR forms to be used in a lease with an option to purchase are:
F913    Lease for Residential Property
F243    Option Agreement to Purchase Leased Property Exhibit
F282    Notice of the Exercise of Tenant’s/Buyer’s Option to Purchase Property      
 
 
Reference: Weissman, Seth. The Red Book on Real Estate Contracts in Georgia (pp. 1341-1346). BookBaby. Kindle Edition.