By: Amanda R. Kison, Esq., Bentley Goodrich Kison, P.A.
Both residential and commercial contracts for purchase that involve pre-closing or post-closing leases can be fraught with potential problems. This is because there are several practical issues which make drafting around potential pitfalls challenging. Understanding some of the potential consequences of structuring a transaction with a pre-closing or post-closing lease will hopefully assist you in both navigating and justifying those challenges.
Understand Your Rights
One of the primary scenarios which result in a litigation referral involves the simultaneous execution of a lease and a purchase contract with an extended sale date. The rationale behind this type of transaction is it allows the buyer to occupy the property while working out the financial aspects of their purchase. However, inevitably the buyer ceases to pay its rental obligation, fails to maintain the property as required under the lease, or fails to timely remit a deposit under the purchase agreement. Although both the lease and purchase agreement likely contains a cross-default provision, often, the rights and obligations of the parties in the event of a default are drafted inconsistently between the two contracts. Where the lease and purchase contract specify different rights available to a particular party in the event of default, determining the appropriate remedy can be challenging. This is because the legal procedure required to resolve a dispute related to a seller’s continued possession of the property, following default, varies depending upon whether they are considered a “tenant” or “equitable owner” will significantly impact the timeline associated with the seller resecuring possession.
If the lease and purchase agreement fail to provide the seller the right to recoup damages in excess of the escrow amount, the seller may be without a remedy for any damages incurred to the property as a result of the buyer’s misuse or negligence. As a result, although drafting around all potential issues may be impossible, thought should be given to whether the standard FR/Bar contract is appropriate in such circumstances. Instead, tailoring the purchase agreement with the assistance of an attorney will help ensure that the lease and purchase agreement contain consistent and harmonious default provisions, which is essential to the prompt resolution of any potential issue.
Similarly, in the context of post-closing leases, the FR/Bar Post-Closing Occupancy by Seller Rider should be used with caution. Often overlooked is the requirement that a “mutually acceptable Post-Closing Agreement” as justification to terminate a contract they no longer wish to pursue, without recourse. As in pre-closing lease transactions, the FR/Bar Post-Closing Occupancy practice may be to incorporate a concise lease as an addendum to the purchase contract, contingent upon closing, which excludes a termination upon election option.
Both pre-closing and post-closing leases may serve an important purpose. However, without a compelling reason to structure a transaction with pre-closing or post-closing lease rights, as the expression goes, the juice is oftentimes not worth the squeeze.
This article is meant for educational purposes only. It is not intended to serve as legal advice and should not be used as a substitute for consultation with an attorney. This article was originally published in the November issue of ELEVATE Magazine.