Lease Option Question

[Matt Maluchnik]

If a lease option has two different contracts --- the Lease, and then the Option (which is paid for)...what happens when the tenant decides to break the lease, but yet the Option still has another 2 years on it?  Are you able to link the option in such a way as to say....If they break the lease, then their option is Null and all monies are forfeited ?

[Bill Gulley]

LOL, my problem is that I'm not sure I'll be in good enough physical shape going ice bound, but I'm working out to see.

An option contract cannot have any performance required by an optionee (buyer) meaning they can't be required to actually do anything, if they are, it's no longer an option but a sale contract. So, no don't tie lease performance to an option, unless you want a sale contract and that carries different interests conveyed to a buyer.

Actually, the value of an option isn't based on the remaining option fee paid or an amortized amount being consumed over time. It's called "being in the money" and is the difference between the current market value less the purchase price with the option fee paid, there is equity in having an option.

Options are pretty well standardized internationally, there are different types, but if an option can be terminated under some future event, it is limited and may not be treated as an option, again you face the sale contract issues. 

These new rules apply to  options with terms greater than 12 months and now require different accounting applications for the seller, per the international accounting standards board and GAP must be used even if it's mom and pop selling, no shoe box accounting methods allowed anymore in connection with option contracts. 

You also have other issues with lease credits (many actually) as you'll have a sale contract and a financing arrangement and with a tenant buyer and the seller being in the business, violations of the SAFE and Dodd-Frank Acts.

Lease-options just aren't the "go-to" contract they were several years ago, rent-to-own is pretty well dead and considered a`predatory lending matter as they were done in the past. 

Remember, in an option the buyer has an interest in the contract, not the real estate, in a sale contract, they buy obtains an equitable interest in the property! :)