by Mark Zinman, Zona Law Group

With home prices on an upward trajectory, we are seeing residents who have option agreements begin to exercise those options. An investor who gave a resident a lease and option 2 years ago, likely could not have projected the substantial increase in home values we have seen in the past 2 years. Therefore, it’s important to remember the law with regards to leases and options.

First, as we have written about numerous times before (and we won’t go into detail here) when properly written, an owner can offer a lease with a separate option to buy the property, for a set price at a set time. The option doesn’t give the resident any equity in the home and it keeps the option separate from the lease. If you fail to follow these terms, what may be written as a lease with option, could be treated as a purchase contract or a contract for conveyance. Needless to say, that makes straightforward things very messy.

Second, when talking about purchase contracts as well other real estate transactions, the material terms must be provided or it won’t be enforced by a court of law. In terms of an option contract, this usually means the option must identify the parties, the date the option must be exercised by, when the sale must occur by, the means by which it can be exercised, the purchase price (or an object way to determine the purchase price) and how fees are to be split. This list is not exhaustive.

Even when the option is vague, that doesn’t end the issue. It’s possible that a resident could sue for damages, even if the option is not clear enough for them to force the sale of the home through a claim of specific performance. In one such case, a resident had an option and sued to enforce it. The price in the option was to be calculated by an appraiser agreed to by both parties and the option further provided that the other terms and conditions were to be stipulated in the future. The Arizona Court of Appeals held that the option lacked essential terms and thus specific performance was unavailable. However, the court noted that the contract was “certain enough to provide the basis for the calculation of damages but not certain enough to permit the court to frame an order of specific performance.” In other words, the investor/owner may win and get to keep the property, but they may still be liable to the tenant for financial damages.

Finally, Arizona courts have repeatedly held that an option must be exercised in accordance with its terms or it won’t be enforced. Therefore, if an option gives a resident two years to exercise the option, an untimely action to exercise the option may simply render the option void.

The lesson here is when you enter into a contract, make sure you write what you mean, and include the necessary terms. Once you have a valid option, follow its terms exactly.