Rent-To-Own tenant/landlord issue

[Ethan Jones]

I own a single family house in Arizona. I rented it out for a few years between 2011-2014. After the tenants vacated, the house was vandalized. There was about $5000-10,000 of work that would have been needed to get the property in rent-ready condition, again. My contractor wanted to buy the house and I wanted to sell the house, so we entered a two-year rent-to-own contract. The terms were that he would fix up the house and pay a reduced rent with a portion of the rent going towards equity for the purchase. The contract also laid out the terms of the sale, where after two years, I would provide owner-financing.

Over the two years of the rent-to-own contract, the tenant/buyer made all his payments except for the last one. He, nor did I, mention anything about or initiate the sale. The following month, he made another rental payment, and he continued to make payments (albeit late). I accepted the rental payments and charged late fees.

Over the past few months, he has made additional improvements to the house. (He is trying to resell the house for a profit.) Just recently, the work on the house has been held up due to him not being able to get a building permit. He has asked for the deed to the house. I explained to him that I have to receive a mortgage and promissory note before signing over the deed to the house. Also, due to his and my miscommunication, I told him that we will use an escrow company to handle the sale. He responded that not receiving the proper work has cost him over $3000 and growing at a rate of $1000 per day for "lost wages and construction progress." He has threatened to take me to court if I do not overnight a deed to him.

Before receiving his threat to sue, I was happy to sell him the house. I only wanted late fees (due to his late payments). Now, I am wondering if I have other options. What should I do? I am obviously not giving in to his demand of sending him a deed without receiving a mortgage and promissory note. His claims of punitive damages don't make any sense, but I'm still concerned about what a courtroom might say.

Any advice/suggestions would be greatly appreciated. Thank you.