September 7th, 2012 at 7:10 pm
As you know, in today’s marketplace, close of escrow is more of a moving target than ever before. Loans are hard to close, lenders do review appraisals and buyers are conducting more inspections than ever. All of these things make buyers more hesitant to remove contingencies and, as a result, make sellers more hesitant to move out. In order to address these concerns, we are seeing more lease backs than ever. By agreeing to the leaseback, we let the buyer conduct their due diligence while allowing the seller to be comfortable that the deal is going to close before they move. Of course, this comfort comes with risk since the lease back creates a full landlord-tenant relationship between the parties. In most cases, the contract defining that relationship consists of one line: “Seller to lease back Property for x days at buyer’s PITI.” That is it. Unfortunately, this language fails to deal with many things that come up in the course of a landlord-tenant relationship. For example, if the above constitutes your entire lease, does the buyer/landlord have a security deposit to look to should the property be damaged during the lease back period? Probably not. Under the language above, who is going to pay for utilities or repairs now that the buyer owns the property? Who is going to pay for insurance? Frankly, I don’t know. What condition does the seller need to leave the property in when they vacate? And, is the buyer/landlord entitled to enter the property, or have a key to it now that they are the owner? Again, these issue are not dealt with by our one line contract, so the answer is unknown and ambiguous.
Of course, and as you know, when a contract insufficiently defines the parties rights, it merely asks for conflict. In this case, since you are the ones drafting the contract, you will be blamed for any conflict and will be asked to make it right, usually with money. So, what can we do to avoid this problem? In truth, it is very simple: For a lease of less than 30 days, use paragraph 2 of the Purchase Agreement Addendum (Form PAA), and for longer leases use a Residential Lease After Sale (Form RLAS). Both of these documents deal with all of these issues and define the parties obligations as clearly as possible. They constitute a full lease covering all of the important landlord-tenant issues. More importantly, they are not custom clauses drafted by you. They are CAR forms. As a result, you cannot be blamed for their terms. So please use one of these forms in every lease back you do. It will better protect your client, and keep you out of trouble at the same time.
As always, contact us with any questions you may have.
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