LEASE/OPTION/PURCHASE PROBLEMS FOR LANDLORDS
By
Andy Hull, Attorney at Law
as
published in the Arizona Journal of Real Estate & Business,
December, 2003
One area of the law that can prove confusing and potentially
difficult is a landlord who enters into agreements that are
both rental as well as have purchase ramifications.
Well-drafted agreements should always be used so that if
problems arise, hopefully, long, expensive, and protracted
litigation can be avoided.
One problem is entering into an agreement to
sell a property and at the same time allowing the buyer to
occupy the home prior to the conclusion of the sale. Under
the Arizona Residential Landlord and Tenant Act (ARLTA), any
occupancy under a sales/purchase agreement is outside the
landlord/tenant laws so an eviction cannot be done until the
contract is cancelled. If considering this type of
arrangement prior to the close of escrow on the purchase,
there should be a separate lease agreement entered into. The
lease should clearly state it is separate and apart from any
sales contract and that any breach of either the lease or
sales contract is a breach of the other agreement. This is
important so that it is clear that a landlord/tenant
relationship exists regarding occupancy of the home.
Using a separate lease then allows the owner to
evict the tenant for any violation under the lease, whether it
is non-payment of rent or any other breach. Without a lease,
a Judge may have no choice but to require the parties to
litigate any issues regarding the underlying purchase contract
in civil court, where the quick and speedy eviction hearing
remedies are unavailable.
One other issue that regularly surfaces is when
a landlord and tenant enter a lease agreement with an option
to purchase the rental property. Again, a well-drafted
contract that clearly shows the agreement to be a lease until
the option to purchase is exercised is critical. The
agreement should state how and when the option can be
exercised and under what conditions the option is null and
void (i.e., failure to make the monthly rental payment).
A recent Arizona Supreme Court case addressed
several of these issues. In Andrews vs. Blake, 205
Ariz. 236, 69 P.2d 7 (2003), the highest Court in our state
had the following question concerning acceptable methods for a
tenant to exercise an option to purchase leased property and
the availability of equitable relief to excuse the tenant’s
failure to timely exercise the option.
In Andrews, the parties entered into a
lease option that purportedly extended the option to purchase
until a specific date. The tenant did pay the landlord money
for that “extension”. There was also a notice provision in
the lease on how to exercise the option. There was
conflicting evidence on when and how the tenant tried to
exercise that option. The Supreme Court found that the notice
provision did not establish the sole or exclusive means of
effectively exercising the option to purchase and that a trial
court had to take evidence to determine that issue.
The Court went on to say that even if it is
determined that the notice to exercise the option was not
received by the landlord, the Court still had to determine if
the tenant could be excused from his failure to timely
exercise the option and, if so, under what conditions.
Generally, Arizona courts have strictly construed options in
lease agreements because such provisions allow the optionee
freedom to exercise or not exercise the option, whereas the
optionor is bound by the option. (“The general rule seems to
be that an option must be exercised strictly accordingly to
the terms and conditions in the option.”)
After reviewing the Andrews/Blake situation,
the Court stated that a tenant’s failure to strictly comply
with the terms of a lease’s option to renew or purchase may be
equitably excused only when the failure is caused by
incapacity, fraud, misrepresentation, duress, undue influence,
mistake, estoppel, or the landlord’s waiver of its right to
receive notice. If the tenant can show one of the
aforementioned circumstances under which equitable relief may
be available, an optionee’s non-negligent failure to timely
exercise an option to renew a lease or purchase leased
property may be excused only if the following three
prerequisites are met, namely: (1) the delay was short, (2)
the delay did not prejudice the lessor/optionor, and (3) the
lessee/optionee would suffer a forfeiture or other substantial
hardship if equitable relief is not granted.
The Court concluded that the test to determine
whether a landlord suffered any injury from tardy exercise of
an option “is whether he changed his position or suffered a
detriment because of the tenant’s delay in giving notice”.
Thus, the issue is not whether the lessor/optionor is
prejudiced by the lessee’s exercise of an option to renew or
purchase but, rather, whether the lessor is prejudiced
“because of the delay” in that exercise. The
Court sent the case back to the trial Court for further
proceedings. The moral of the story is, again have your
contracts well drafted to avoid these costly and
time-consuming issues.
ANDREW M.
HULL
(Please note the date on this and all
articles. The law changes and this information may not
be correct.)
Attorney at Law
301 East Bethany Home Road, Suite 295-C
Phoenix, Arizona 85012-1266
602-230-0088
Fax 230-7421