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What Is A Lease Option?

A lease option is an Assured Short hold Tenancy (AST) agreement that comes in conjunction with an option agreement that gives you the absolute right to purchase the property at an agreed price over a fixed period of time.  This type f document is quite common in transacting commercial property, but can equally be used for the buying and selling of residential property.  Your solicitor will be well aware of this type of legal document.

Why A Lease Option?

How many times have you heard that buying your own home can be one of the most stressful times of your life? Added to that is the fact that an average one ‘sale’ in three never reaches completion. Why? Because the traditional way that people buy and sell property is by verbal agreement, with either party able to change their mind at any time.  This ridiculous situation is compounded even further when properties are in a chain and each sale is conditional upon all the other in order to reach completion.

The above scenario goes on each and every day.  If in doubt, just ask your mortgage adviser, estate agent, solicitor, or friends that have bought property in the past.  Now there is another way to buy your own home without having to subject yourself to this as you will be purchasing your home with a lease option over an extended period of time, prior to completing the purchase, as normal, at a later date at an agree price.

There are advantages for both the buyer and the seller who both now have greater control over the sale rather than being exposed to the traditional system that ends up costing both parties financially and emotionally.

What Payments Do I Make This Way?

There are no hard and fast rules on how to structure the payments of the buyer.  However, like a repayment mortgager is structured between interest and capital, a lease option is structured between rent and capital.  In both cases, anything that constitutes capital payments goes towards the purchase of the house, and anything else doesn’t.  Remember, because you are purchasing the property, the rent payable may not be comparable to the rent you would pay if you were merely renting only.

Quite often you will pay less purchase deposit, or option fee, at the beginning than what you would if buying with a mortgage.  However, with the passing of time your payments are gradually building up the size of this deposit.  Plus if property prices go up, that is all yours to keep, unlike with shared ownership schemes.

Advantages of a Lease Option Agreement:

What are the steps I take in order to move into the house?

1. You will need to complete an application form to take out the option on the property.  An application fee is payable when the application is logged.  Instead of spending hundreds of pounds building surveys and local searches, resent copies of these documents will already be available from us to present to your solicitor.  We do not hide any information about the house.
2. We will ask you to provide us with a copy of your credit file report and all references to support the information you’ve already given to us.  What is important for us to establish is your personal and financial circumstances today in anticipation of you being in the likely position, at a later date, to buy the house from us.
3. Consult a solicitor or conveyance for an explanation of the option agreement and Assured Short Hold Tenancy (AST) Agreement, to ensure that it represents the agreement reached with the landlord/seller for the purchase of the house.  The solicitor or conveyance will explain the title and option fees payable. Don’t forget to remind yourself that you will be living in the property, you’ll also have have a clear and concise document that gives you the right to purchase, and without all the purchase aggravations previously mentioned.  You should ask your solicitor if the terms of the agreement actually does this.  Unless your solicitor can offer practical alternatives to get you into your own home today, then you may wish to assess the merits of the lease option according to your own personal needs.
4. Sign the AST and Option Agreement.  To comply with our lender requirements, the AST shall be for a fixed period, between 6-12 months depending on the size of your initial payments.  The buyer is entitled to request a renewal of the AST for any further extension for another fixed term, provided the terms and conditions of the agreement have been previously met.
5. Pay the initial option fee (often 2-3% of purchase price.)  If you can demonstrate DIY skills to help improve property value towards your deposit, this may also be taken into consideration as that also helps improve your equity towards your purchase.
6. Complete the standing order authority for the direct debit of monthly payments, i.e. monthly rent and option fee, from your bank account into the account of the managing agent representing the landlord-seller.
7. Our solicitors will then exchange the respective AST and Option to make the contract legally binding.
8. Move into the house on the Access Date specified in the AST.

What are the Purchaser’s Obligations?

Pay the combined monthly rent and option fee on time. Payments are due according to the time interval stipulated on the AST and option agreement.  Maintaining timely payments is essential, as the landlord-seller has instructed its managing agent to make the monthly mortgage payments to the lender.  Also, in order for the tenant-buyer to be well positioned to qualify for a future mortgage, a consistency of timely monthly payments is equally essential.

Keep the house in good condition and repair. The purchaser must keep the house and garden in a neat, clean and tidy condition, which means removing rubbish, keeping the lawn mowed and not storing old cars on the premises.

The purchaser shall remain in control of the house.  The purchaser cannot leave the house vacant in excess of 30 days.

No demolition or alteration will be made to the house. The purchaser must maintain the property in good condition, and reasonable requests to do decorative improvements will be considered by the landlord-seller.

Information on the Initial Deposit.

Minimum deposit required. We always require an initial option fee, usually with a minimum of 2-3% of the purchase price.  However, due to the demand and our ability to move into your own home within weeks, not months, we often find the people are willing to pay more, as the option fee all goes towards their purchase deposit.

Release of deposit funds to seller. In order to provide you with this unique opportunity, one condition is that all option fees are released to us when received from your solicitor.  This is needed so that we can recoup some of our costs incurred on the house up to the point of sale to you.  Don’t forget that, in return, you will be living in your own home, and not waiting around in despair over whether the sale will go through or not, as what happens with a conventional sale.

Information on the Option Fees

All option fees help increase the amount of your purchase deposit. In addition to the initial lump sum paid, the monthly option fees also add to the purchase deposit.  Should you need to request an extended fixed period, then the lump sum option fee due at that time also goes towards your overall deposit by the time you are in a position to purchase.  There is a renewal fee payable to cover the costs of having our solicitor renew the agreement.

Payments are agreed in advance. The financial commitment is known from the beginning with the lump sum option fees, monthly option fees, and rent all specified for the whole term of the Lease Option Agreement.

Purchase outright, with a mortgage, or even sell without buying. The purchaser has the right to purchase the property at any stage during the lease option agreement by paying the balance that is outstanding at that time.  This can be done by you paying us the balance in full, getting a mortgage with a bank, or even marketing the property for an outright sale to a 3rd party.

Are there any other costs?

When sending a written request to proceed with the purchase, an administration fee may be payable (at sellers’ discretion).  This will be explained before entering from the outset before entering into any agreement.

What if the purchaser defaults?

What happens if the rent or instalments option fee are not paid on time? If the rent or instalment option fee is late, then the instalment option fee for that period does not get credited to the eventual purchase of the house.  Should these payments fall into areas after 21 days of the due date, the option agreement will be in default.  The tenancy, however, will continue to be in effect and can only be terminated as prescribed by the Landlord and Tenant Act.  In order to later substantiate to a lender a regular payment history, it is in the buyer’s interests to maintain timely payments.

What happens on termination of the tenancy? The purchaser must vacate the house and leave it clean, orderly and broom-swept condition.

What happens to the option fees paid? The intention of the seller form the outset is to sell the house, but all money paid towards the option fee is non-recoverable.  This is no different to a traditional sale after exchange of contracts, where the buyer must pay 10% deposit and fails to complete the purchase for whatever reason.  The cost to the buyer in such circumstances with a lease option agreement is likely to be much less.

Summary

In many respects the lease option legally constitutes a purchase in the traditional sense, except that it is over an extended period of time during which you may live in the property as a tenant until you exercise the right to purchase anytime during the option agreement at the agreed purchase price.  Otherwise, the terms and conditions in many ways mirror that of a traditional contract of sale.

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