MODERN RESIDENTIAL
LEASE OPTION
Chapter 47G
Effective October 1, 2010
WHAT IS A LEASE OPTION

Practical Definition

An agreement whereby a tenant is not only
granted possession of real property in exchange
for payment of rent to the landlord but where the
landlord also grants the tenant the option to
purchase the property rented but where the
landlord also grants the tenant the option to
purchase the property rented
WHAT IS A LEASE OPTION (cont.)

Statutory Definitions 47G-1:



Covered lease agreement or lease agreement. - A
residential lease agreement that is combined with, or is
executed concurrently with, an option contract.
Option contract or contract. - An option contract for the
purchase of property that includes or is combined with, or
is executed in conjunction with, a covered lease
agreement.
Property. - Real property located in this State, upon
which there is located or there is to be located a structure
or structures designed principally for occupancy of from
one to four families that is or will be occupied by the
purchaser as the purchaser's principal dwelling.
WHAT IS A LEASE OPTION (cont.)

What is it NOT?

Lease with a later granted Option


Many members of the Bar believe that a “trial” lease
period where the landlord test-drives the tenant to see
if they are worthy of being granted an option
The parties often execute a MOU to memorialize the
agreement of the parties to later execute an option so
long as the tenant is not in default on the lease
WHAT IS A LEASE OPTION (cont.)

What is it NOT? (cont.)


Pure Option that merely grants a prospective buyer the right to
purchase the property but does not grant the potential buyer any
possessory rights
Lease-Purchase (maybe – maybe not)



A lease purchase is a long-term rental agreement coupled with a fully
executed purchase contract on the rented property
For the purposes of 47G, there may not be a difference. Strict definition
says “lease purchase” not covered; however, definitions from other
statutes suggest State may consider Lease-Option and Lease-Purchase
the same. [§ 115C-528(b) & § 148-37.2(b)(3)]
In addition, it is clear the legislative intent here is consumer protection
and it seems incongruous not to protect lease-purchase buyers in the
same way as lease-option buyers.
WHY DOES IT MATTER

Purpose of the New Statute


New Statute applies to covered agreements
executed 10/1/2010 or after
Roy Cooper sought to reign in what he saw as
rampant fraud perpetrated by real estate investors
on unsuspecting citizens

The legislation was part of more comprehensive
legislation largely affecting real estate investors
commonly referred to as SB 1015
WHY DOES IT MATTER

Penalty for Screwing it Up - § 47G-7
 A violation of any provision of this Chapter constitutes an
unfair trade practice under G.S. 75-1.1.



Safe Harbor - Nothing in this Chapter shall be construed to
subject an individual homeowner selling his or her primary
residence directly to an option purchaser to liability under G.S.
75-1.1.
An option purchaser may bring an action for the recovery
of damages, to void a transaction executed in violation of
this Chapter, as well as for declaratory or equitable relief
for a violation of this Chapter.
The rights and remedies provided herein are cumulative
to, and not a limitation of, any other rights and remedies
provided by law or equity.
PRACTICAL STUFF

What Lease Options are Covered?


Residential lease
Combined with or executed concurrently with an
option


Option purchaser must be an individual
For property designed for 1 to 4 families intended
to be occupied by option purchaser as primary
residence

Vacant land where type of residence to be built
PRACTICAL STUFF

Minimum Requirements § 47G-2

Option must be in writing & contain all terms


Copy delivered to purchaser at time of signing
Signed and acknowledged by all parties
MINIMUM REQUIREMENTS

Option must contain at least the following:









(1)
The full names and addresses of all the parties to the contract.
(2)
The date the contract is signed by each party.
(3)
A legal description of the property to be conveyed subject to an option to
purchase.
(4)
The sales price of the property to be conveyed subject to an option to purchase.
(5)
The option fee and any other fees or payments to be paid by each party to the
contract.
(6)
All of the obligations that if breached by the purchaser will result in forfeiture
of the option.
(7)
The time period during which the purchaser must exercise the option.
(8)
A statement of the rights of the purchaser to cure a default, including that the
purchaser has the right to cure a default once in any 12-month period during the period
of the covered lease agreement.
(9)
A conspicuous statement, in not less than 14-point boldface type, immediately
above the purchaser's signature, that the purchaser has the right to cancel the contract
at anytime until midnight of the third business day following execution of the option
contract or delivery of the contract, whichever occurs last.
MINIMUM REQUIREMENTS (cont.)

Right to Cancel

3 days from signing or delivery of copy to
purchaser (whichever occurs later)


Must return any option money paid within 10 days of
notice
Must return all other amounts paid less fair rental
value & damage
MINIMUM REQUIREMENTS (cont.)

Memorandum of Option




Recorded within 5 business days after option is signed by
purchaser and seller
Seller’s responsibility to record
Seller must pay for recording, unless parties agree
otherwise
Must contain at least:



the names of the parties
the signatures of the parties
a description of the property, and applicable time periods
including right to cure
OTHER THINGS TO NOTE


Chapter 42 Landlord-Tenant Law applies to the lease
Forfeiture



Cannot forfeit without a breach of purchaser’s express
obligation under the option contract AND
Option contract provides that as a result of such a breach
the option may be forfeited
Must notify of intent to forfeit and been given the right to
cure


30 days to cure in “every 12-month period during the period of
the covered lease agreement”
Delivered by hand or according to GS 1A-1, Rule 4
OTHER THINGS TO NOTE

Seller’s Default on Loan Secured by Property


Purchaser may exercise the option OR
Cancel and rescind the contract


Seek any remedy at law or equity
Seek immediate return of all monies paid to seller
LEASE OPTION GONE WRONG

Court


Most Magistrates will immediately dismiss as
soon as Tenant says something about option
Probably should be filed in District Court

Maybe Superior due to amounts involved and
extinguishment of Equity of Redemption
LEASE OPTION GONE WRONG

Chapter 75 Reality


Continuous Violations are Separate Offenses
AG has duty to investigate




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Judge may order repayment of all money
Civil penalties possible
Treble Damages
Attorney Fees
For a more in depth discussion on Chapter 75 and the case law surrounding it,
please refer to North Carolina Unfair Business Practice By Noel L. Allen
LEASE OPTION GONE WRONG

Tenant Recovery


Chapter 75
Damages



Excess Fair Market Rent
Option Fee
Equitable Relief
REAL LIFE EXPERIENCES

Landlord Nightmares



Tenant in breach claims MOLD
Tenant refuses to move-out
Tenant Nightmares

Seller’s default on the mortgage
GUIDELINES

KNOW THE STATUTES



Read the law
Work with other attorneys who have done this to
make sure you don’t step on any landmines
Disclose, disclose, disclose


What’s this option fee, anyway?
Who do you represent?
GUIDELINES

Option Fee


Max 5% of Option Price (not really a rule)
Option Term

Short?



Less for option fee
Hedges market value fluctuations
“Rent Credits”