MODERN RESIDENTIAL LEASE OPTION

1. MODERN RESIDENTIAL LEASE OPTION Chapter 47G Effective October 1, 2010

2. 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

3. 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.

4. 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

5. 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.

6. 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

7. 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.

8. 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

9. 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

10. 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.

11. 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

12. 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

13. 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

14. 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

15. 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

16. LEASE OPTION GONE WRONG • Chapter 75 Reality • Continuous Violations are Separate Offenses • AG has duty to investigate • 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

17. LEASE OPTION GONE WRONG • Tenant Recovery • Chapter 75 • Damages • Excess Fair Market Rent • Option Fee • Equitable Relief

18. REAL LIFE EXPERIENCES • Landlord Nightmares • Tenant in breach claims MOLD • Tenant refuses to move-out • Tenant Nightmares • Seller’s default on the mortgage

19. 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?

20. 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”