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Review this guide for an overview of the main terms and options of a lease with option to purchase.

Lease with Option to Purchase

This agreement gives the tenant the right to buy the rental unit if certain conditions are met. This is commonly known as a “rent-to-own” or “purchase option.” The landlord may require that the tenant occupy the unit for a certain amount of time before they become eligible to exercise the purchase option. Rental payments must be made on time and in full in order to be credited toward the purchase price.

You can choose how much of each rental payment gets credited toward the purchase price of the property. You also have the option to charge an upfront, nonrefundable fee in return for giving the tenant the purchase option.

If the tenant chooses not to exercise the purchase option, they will not be entitled to any refund. However, the landlord is required to refund the upfront fee charged for the purchase option (if charged) if the landlord is unable to convey good and marketable title to the tenant after the purchase option is exercised.

You can choose whether and how much interest will accrue on the unpaid balance of the purchase price. This interest will begin to accrue when the tenant occupies the rental unit, and the tenant will be responsible for paying it in addition to the purchase price if they exercise the purchase option. Including interest can help ensure that the amount paid for the unit reflects its true value at the time the tenant is able to pay. The tenant will also be responsible for paying any and all outstanding amounts under the lease in addition to the purchase price.

The landlord will retain the right to sell the property to another owner at any time during the agreement, who will still be required to honor the terms of the original lease.

Fixed-Term vs. Periodic Tenancy

You can choose whether the agreement creates a fixed-term or periodic tenancy. A fixed-term tenancy requires the tenancy to end on a specific date unless the parties agree to renew the agreement for an additional term. However, a periodic tenancy has no set end date and continues indefinitely week to week, month to month, or year to year until one of the parties chooses to end it.

Fixed-term tenants normally have different rights than periodic tenants in terms of what is required when the tenancy expires or is terminated by the parties. The eviction notice time frame is different as well.

Rental Payments

Next, your agreement specifies the rental payment amount and how often it will be paid.You can choose to require payments weekly, twice per month, monthly, every two months, every six months, or annually.

The landlord can allow multiple payment methods, including payment by check, cash, direct deposit, wire transfer, credit card/debit card, money order, cashier's check, online, or all of the above. You can also add your own custom payment methods. The agreement should also indicate all accepted payment locations, such as in person, online, or by mail. Include details for paying through an online payment portal, if available.

Signing Incentives

A signing incentive is a fantastic way to encourage potential tenants to sign long-term leases or agree to higher rental payments. Add the details for any signing incentive you have offered to the tenant. This includes rent concessions or any other additional benefit or deal.

Optional Fees and Deposits

Next, add any fees that will be charged for late rental payments, dishonored payments (i.e. bounced checks due to non-sufficient funds), and lost keys. If you choose to add these fees, your agreement will include standard language that enforces the landlord’s right to collect them. You can also add your own custom fees or deposits by entering the details when prompted.

Security Deposit

Tenants are always on the hook for covering the cost of all damages they cause to the rental unit regardless of whether or not the landlord collects a security deposit. However, it is normally recommended that the landlord collect a security deposit upfront. This will make it easier to ensure that funds are readily available for repairing any damage caused by the tenant. Otherwise, it can be very difficult to recover these funds from the tenant when they are moving out.

State law often imposes various requirements on security deposits, including the maximum amount that may be charged, how long the landlord has to return any funds that remain to the tenant after the tenancy has ended, and what to do with interest that accrues on the deposits. Landlords are responsible for familiarizing themselves with their state and local laws. A good place to start is usually finding the relevant state law—usually called the “Landlord-Tenant Act” or something similar.

The landlord will be allowed to use the security deposit to repair any damage caused by the tenant that go beyond normal wear and tear to the premises, common areas, and any furnishings provided. Here, “normal wear and tear” means the type of deterioration that typically occurs when using the premises as they are intended to be used and without negligence. For instance, carpet and flooring suffer normal wear and tear simply from the repeated stress of being walked upon. Doors, walls, cabinets, and appliances will normally receive minor nicks and scuffs over time. Unfortunately, such normal wear and tear is part of the landlord’s cost of doing business and cannot be deducted from the security deposit.

Finally, the agreement states the requirements that the tenant must meet in order to have any remaining security deposit funds returned at the end of the tenancy. This includes the following requirements:

  • The full term of the agreement has ended or the agreement has been properly terminated according to its terms
  • All rent and outstanding fees or charges have been paid by the tenant
  • All utility bills are paid in full
  • All keys and other items belonging to the landlord have been returned
  • All of the tenant's personal property has been removed
  • The unit has been thoroughly cleaned

Substitute Tenants

You can specify whether the tenant can break the lease by assigning their obligations to a substitute tenant, thereby releasing the tenant from the agreement. In this scenario, the landlord is still free to reject any potential substitute tenant that is deemed unacceptable. The landlord may also negotiate a new lease with the substitute tenant on more favorable terms. Even if you decided to leave this clause out of the lease, the landlord is still free to allow substitute tenants later on.

Subletting

The agreement prevents the tenant from subletting the unit to another occupant without first obtaining the landlord’s written consent. Violating this rule is grounds for terminating the lease and evicting the tenant.

Move-In/Move-Out Inspection Checklists

LegalNature’s lease with option to purchase includes a property inspection checklist that the landlord can use at move-in and move-out to document any damage present in the unit. It is always recommended that you complete the checklist and have both parties sign it in order to prevent disputes. The checklist must be completed at move-in in the following states:

  • Arizona – Tenants also have the right to be present at a move-out inspection (Arizona Revised Statute 33-1321(c)).
  • Georgia – Only required if the property is managed by a third party such as a property management service or if the landlord owns 10 or more rental units (O.C.G.A. 44-7-36). Prior to tendering a security deposit, the tenant shall be presented with a comprehensive list of any existing damage to the premises, which shall be for the tenant's permanent retention. The tenant shall have the right to inspect the premises to ascertain the accuracy of the list prior to taking occupancy. The landlord and the tenant shall sign the list and this shall be conclusive evidence of the accuracy of the list but shall not be conclusive as to latent defects. If the tenant refuses to sign the list, the tenant shall state specifically in writing the items on the list to which he or she dissents and shall sign such statement of dissent (O.C.G.A. 44-7-33a).
  • Hawaii – Tenants also have the right to be present at a move-out inspection (HRS S. 521-42(6)).
  • Kansas – Completed jointly within five days of initial occupancy or delivery of possession (Kann Stat. Ann. 58-2548).
  • Kentucky – Tenant has the right to separately inspect the premises in order to ascertain the accuracy of the landlord's list of damages (Ky. Rev. Stat. Ann 383.580(2)).
  • Maryland – Only required if the landlord collects a security deposit (Md. Code Ann. S. 8-203.1(a)(1)).
  • Massachusetts – Only required if the landlord collects a security deposit (Mass. Gen. Laws Ann. Cha. 186, Section 15B(1)(b)(iii)).
  • Michigan – Leases must include a checklist with the following 12-point boldface type at the top of the first page: "You should complete this checklist, noting the condition of the rental property, and return it to the landlord within 7 days after obtaining possession of the rental unit. You are also entitled to request and receive a copy of the last termination inventory checklist which shows what claims were chargeable to the last prior tenants." (Mich Comp Law 554.608(4)). The seven-day return time frame may be shortened in the lease (Mich Comp Law 554.608(3)).
  • Montana – Only required if the landlord collects a security deposit (MCA 70-25-206).
  • Nevada – NRS 118A.200(3)(k)
  • New Hampshire – N.H. Rev. Stat 540-A:6(I)(b)&(c)
  • North Dakota – Must be signed by the landlord (ND Century Code 47-16-07.2).
  • Utah – Utah Code Ann 57-22-4(3)
  • Virginia – Completed within five days of move-in by the landlord or tenant or both together, and the landlord must disclose within this report the known presence of mold (VA Code 55-248.11:1–2).
  • Washington – Only required if the landlord collects a security deposit. Both the landlord and tenant must sign, and the tenant must receive a copy.
  • Wisconsin – Only required if the landlord collects a security deposit (Wis. Stat. 704.08). The tenant has a right to inspect the rental unit, give the landlord a list of defects, and receive a list of damages charged to the prior tenant (Wis. Admin Code DATCP 134.06(1)).

Lead-Based Paint Disclosures

Federal law requires landlords and their tenants to sign a "Disclosure of Information on Lead-Based Paint" for any property constructed before 1978. The landlord must retain their signed copy for at least three years following the tenancy. Tenants in these properties must also receive approved lead hazard information, such as the pamphlet "Protect Your Family From Lead in Your Home" or a similar pamphlet approved by the state environmental protection agency.

In Maryland, landlords must register any rental properties built prior to 1978 with the state and pass an annual inspection.

Vermont landlords are required to provide the lead hazard pamphlet mentioned above, post a notice approved by the state requesting that tenants report any chipped or damaged paint, and attend an annual training program. The Vermont Rental Guide includes an example of an approved notice on page 65.

State and Local Disclosure Requirements

Your local law may require additional disclosures to be made to the tenant. This could include disclosing serious problems affecting the unit’s habitability, housing code violations, radon warnings, mold or flood zone warnings, bed bug disclosures, carbon monoxide, asbestos, local rental control rules, and more. If you are ever in doubt, it is always best to err on the side of over-disclosure. You should be able to find your local disclosure requirements on your city or county website or by contacting a city administrator or a local lawyer.

Note that leases with purchase options for mobile home tenants may have specific state laws that govern them. Be sure to research these for any mobile home tenants.

Wisconsin landlords are required to disclose any nonstandard rental terms in a separate document titled “NONSTANDARD RENTAL PROVISIONS” provided to the tenant (see Wis. Admin. Code ATCP 134.06).

Final Steps

When you finish the questionnaire, have each party sign and date at the end of the document and also initial each page to show it was read. Retain your copy for your records and make an electronic backup if possible.

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