Will I lose my down payment if I do not exercise my lease option?

I am going to summarize the question for our readers and then post the full question below.

The question: With a rent-to-own or lease option agreement, will I lose my down payment money if I fail to exercise my option?

Here is what the visitor actually wrote:

I was hoping that you could help me. Three years ago we entered into a Lease to Purchase agreement for our home. Our contract states:

Down payment of $*** shall be made in 36 equal monthly installments of $*** (Monthly Payment) payable on the first day of each month until paid, which monthly payment includes the monthly Down Payment installment together with interest of 12% per annum as additional consideration to Seller for allowing Buyer possession of the home during the term of this Agreement (the Down Payment interest).

We also have a clause that says:

In the even that the Buyer is unable to obtain financing to purchase the home upon the expiration of this agreement, Buyer shall be entitled to a return of the Down Payment less any costs and expenses of the seller is entitled under any other provisions of this agreement. The parties expressly acknowledge and agree that, whether or not the Home is purchased by the Buyer, Seller is entitled all Down Payment interest due under this agreement.”

Unfortunately, due to the economy, our credit is not as good as three years ago, and the home values have depreciated, so we aren’t able to obtain financing. Even the company that is now servicing our contract (it was sold) will not provide financing. We have been speaking to the financing company, and they want to enter into another lease to own contract with a balloon payment in 36 months. If that is all they are offering, we would like to get our refund and find another home. Their representative said that he would have to consult their attorneys to discuss our “interpretation of the contract.

Am I reading this correctly? Is this worth pursuing? Our contract is up within the next 30 days, and we don’t know what to do. Can they foreclose without returning our money? We have been going back and forth with them for the past three months and are getting nowhere.

Is it worth hiring an attorney? Do we have a case?

My answer:

With lease option agreement the down payment as you call it is most often considered option consideration in the legal world. This is a fancy why of saying you as the potential buyer of the home want the ability and flexibility of buying or not buying said home over some period of time. During this period of time the seller can not sell the home to another buyer and this option consideration is compensation for taking the home off the market and making it available only to you. In essence, you are paying to have all of the control over whether you buy or notyou are paying to have the option.

So if that was the intent of the option contract you signed then the answer is sadly, No. The seller gave you the option for the duration of the agreement and deserves to get his compensation for extending you the option.

However, if the option consideration in this contract is only the interest on the down payment then you did compensate the seller for extending the option and the principal amount of the down payment should be returned to you minus the costs and expenses of the seller is entitled under any other provisions of this agreement.

Of course the clauses above are ambiguous in that they refer to the interest on the down payment as additional consideration for the option which begs the question, Where in the contract is the actual consideration if the interest is additional consideration?.

The second clause you provided states your down payment is returnable minus expenses if you are denied financing. Is this the only way the down payment is refundable?

What if you simply dont want to exercise your optionis the down payment refundable then?

What if you were offered financing that is totally unacceptable from a rate, cost, and payment stand point therefore you reject the offered financing? Is the down payment is refundable under these circumstances?

So as you can see there are a ton of extra questions which the provided clauses dont answer. But I have found enough confusion that any decent real estate attorney could probably get your money back.

But you NEED an attorney!

I am not an attorney nor to a play one on TV or the Interentso do NOT take this as legal advice. Get a real legal opinion before making any decisions.

With that said, I am a mortgage expert and I can say since they included references to interest at 12% per annum and other mortgage lending language they opened another door of litigation. Since they are clearly now charging interest they had to follow all of the lending laws like RESPA disclosure laws when it comes to disclosing the terms of the loan legally to you as the borrower.

Did they do that?

Did you get a Good Faith Estimate and Truth-in-Lending disclosure outline the terms of the loan they were extending to you? If not, they probably violated Federal lending laws.

Another area to check is licensing. In your state at the time this loan was extended to you, did the lender have the appropriate license? If not, they may have in addition to violating Federal disclosure laws, may also have violated State licensing laws to boot.

Yesonce again you must get a lawyer. Tell him or her about these issues and most likely with one phone call or letter, youll get your money back. I hope this sheds some light on your lease option consideration question.

Good Luck and thanks for the question!

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