By Mark Zinman | Zona Law
Many investors love to cover their bases in every way they can. However, sometimes having too many different types of provisions in a contract just sets the stage for litigation. This often occurs with investors who will combine a Lease with an option to purchase or a Lease with an Agreement for Sale. Arizona has separate statutory schemes to deal with different types of property interests and issues. For example, residential leases are governed by the Arizona Residential Landlord Tenant Act, while an agreement for sale has its own set of specific statutes setting forth the requirements, and the same applies to mortgages and deeds of trust. Make sure which laws you want to be governed by, and make sure your documents reflect that choice and do not accidentally incorporate other types of agreements.
Often, we see investors create their unique lease/option, agreement for sale, or lien agreement, by picking and choosing some of their favorite provisions from all different types of agreements. Rather than getting the benefit of all these different provisions, this practice typically has the reverse effect of confusing which statutes apply and places the agreement in the position of having to comply with numerous unrelated statutes and no clear route to addressing any defaults.
Imagine, for a second, going into a car dealership and wanting to buy a car. You get a contract that sets forth the 5-year car loan at a 0.9% rate, and you get excited that it’s a good loan rate. In the fine print, you later find out that it says you need to return the car at the end of the 5 years. You know that leases don’t usually last 5 years, but at the same time, you are confused that the writing requires you to return the car. The question then is, what type of contract did you really get? Obviously, this should never happen with a car dealership, but it all too often happens with real estate.
This most often occurs when a lease is coupled with an option to purchase. As a lease, the laws are pretty straightforward and allow an eviction when a default occurs. Now add the option complication, and suddenly you may have inadvertently removed your ability to file an eviction because the tenant has an equitable interest in the property. This may seem minor, but when you compare an eviction that takes less than a month and a few hundred dollars to a $30,000 quiet title two-year ejectment action, the problem becomes clear. To save a lot of time and money down the road, it is recommended that you have counsel assist in creating your forms and don’t add or delete provisions without further legal advice.
We think of this as a spectrum of legal documents, with a lease being on one side and a completed sale being on the other. If a person is under a lease, you can do an eviction when they don’t pay. If they have some type of equitable interest, such as buying the home over time, you may need to do an ejectment or forfeiture. If they bought the property, and you kept a seller carryback, you may need to do a foreclosure. Your remedy (and the associated cost and time) is controlled by how well you draft your document. Drafter beware.