A rent-to-own lease agreement gives the landlord and tenant the flexibility to structure a purchase option in the event the tenant eventually wants to buy the property. This help guide provides an overview of some of the key provisions and considerations of the agreement.
In this agreement, the tenant has the ability to purchase the unit being leased if he or she meets the requirements listed. This is often called a "rent-to-own" provision or "purchase option." You can choose to make this purchase option contingent upon the tenant first occupying the unit for a certain number of months. You can also choose whether all or a portion of each rental payment will be credited toward the eventual purchase of the property. Finally, you have the option of charging an upfront, nonrefundable fee in return for giving the tenant the purchase option.
The tenant will never be entitled to a refund of any payments credited toward the purchase price. However, if the landlord is unable to convey good and marketable title when the tenant exercises the purchase option, then the landlord must refund the initial fee paid for the purchase option.
After exercising the purchase option, the tenant must be sure to make payments on time and in full for the payments to be credited toward the purchase of the premises. The tenant must also remain an occupant for the minimum number of months specified in the agreement in order to be able to exercise the purchase option. This helps ensure that the tenant makes regular payments and makes the cash flow more predictable for the landlord.
When the agreement begins, interest will immediately being accruing on the unpaid principal balance of the purchase price at the rate you choose, and rental payments will be credited against the unpaid principal balance as interest continues to accumulate. In addition, any unpaid obligation under the terms of the agreement still due to the landlord at closing will be added to the principal balance of the purchase price.
Finally, the landlord also has the right to sell the property to another party at any time; however, the new buyer must honor all of the terms of the agreement.
A rent-to-own agreement creates a fixed-term tenancy. This is simply a tenancy agreement that states that it will end upon a specific date in the future, usually about six months or a year from the start of the tenancy. A periodic tenancy, on the other hand, has no set end date and usually continues from month to month until one of the parties chooses to terminate the tenancy.
Many states provide fixed-term tenants different rights than periodic tenants. This most commonly impacts the tenant's rights upon terminating the agreement or being evicted. The proper procedure for cancelling a fixed-term or periodic tenancy depends on the terms of the agreement and state law. If you choose to create a fixed-term tenancy, this agreement states that the tenant must provide 30 days' notice of his or her intent not to renew the agreement when it expires.
For fixed-term tenancies, the agreement will automatically expire at the end of the term. If the tenant holds over by staying on the premises and the landlord does not notify the tenant to vacate the unit when the agreement ends, then the agreement will convert to a periodic tenancy and continue on a month-to-month basis until terminated.
This section of your agreement sets how often rental payments are due. A monthly payment structure is most common. However, you may also choose for rent to be paid weekly, twice per month, every two months, every six months, or once per year.
When specifying the location where the tenant must make payments, you may add multiple locations as a convenience to the tenant. You may also provide the details for any online payment portal in this section. The same applies when identifying the accepted payment methods. You may allow the tenant to pay via check, cash, direct deposit, wire transfer, credit card/debit card, money order, cashier's check, online, or all of the above. You may also add custom payment methods.
Signing incentives are great ways to motivate potential tenants to agree to longer-term leases or higher rental payments. You may add the details of any signing incentive you have agreed upon. Signing incentives include rent concessions or other extra benefits that are not standardly included for your tenants. Even if an incentive is normally provided to all tenants, it may still be a good idea to include it here so that the tenants are clear on the details.
You may choose to add fees for late rental payments, dishonored payments (i.e. bounced checks due to non-sufficient funds), and lost keys. See our FAQ for your state's rules. If included, the relevant sections of your agreement will contain standard language enforcing the landlord's right to collect the fees. You also have the option of requiring additional fees or deposits by entering your own custom language.
In the absence of a security deposit, tenants are still required to pay for any damage they cause to the property. However, it is recommended that the landlord always require tenants to pay an upfront security deposit. This will help ensure that the tenant pays for any damage discovered by the landlord at the end of the tenancy and helps avoid costly litigation that would be required to enforce the agreement in court.
Note that most states impose requirements on security deposit maximums, refund time frames, and accrued interest on deposits. Review the following FAQs for state-by-state rules.
The landlord may use the security deposit to repair any damage the tenant causes beyond normal wear and tear to the premises, the common areas, and any furnishings provided by the landlord. "Normal wear and tear" means deterioration that occurs when the premises, or any furnishings provided, are used as intended, without negligence or abuse by the tenant or any of the tenant's guests or subtenants (if permitted).
Lastly, the agreement spells out specific requirements that the tenant must follow in order to have all or part of the security deposit returned. Such requirements include the following:
The parties may agree that the tenant may break the agreement by presenting the landlord with substitute tenants. This allows the current tenants to be released from the agreement. The landlord may refuse to accept any substitute tenants presented if the landlord has reasonable grounds for the refusal. The landlord may also negotiate a new agreement on any terms desired.
It may be a good idea to include this provision so that the tenants are aware of this option ahead of time. Even if you do not choose to include it, the landlord can always agree to allow for substitute tenants later on.
This agreement includes a comprehensive Move-In/Move-Out Inspection Checklist to provide evidence of the condition of the property and to facilitate the security deposit return process. It is highly recommended that this checklist be completed both at move-in and move-out regardless of the state in which this agreement occurs; however, state law requires that a move-in checklist MUST be completed in the following states:
For properties built before 1978 (i.e. pre-1978 property), federal law requires that the landlord and tenant (and their agents) sign a "Disclosure of Information on Lead-Based Paint," which is included for you. Landlords must keep the signed copy of the "Disclosure of Information on Lead-Based Paint" for at least three years as compliance with the rules. Tenants must also receive the federally approved lead hazard information pamphlet "Protect Your Family From Lead in Your Home" or a similar pamphlet approved for use in your state by the Environmental Protection Agency.
Note that in Maryland, rental properties built before 1978 need to be registered with the state and pass an inspection prior to every change in occupancy. For more information, visit the Maryland Department of Environment (MDE) website.
Note that in Vermont, landlords are responsible for providing the federal pamphlet mentioned above, posting an approved notice asking tenants to report chipped or damaged paint, and attending an approved training program for lead paint maintenance annually. For an example of an approved notice, see page 65 of this Vermont Rental Guide.
Often, local law requires additional disclosure requirements that need to be disclosed before or at the signing of the rental or lease agreement. For instance, landlords are often required to disclose serious problems that affect the rental unit's habitability; any housing code violations; mold or flood zone warnings; radon warnings; bed bug disclosures; carbon monoxide, asbestos, and other warnings; the presence of a methamphetamine laboratory or a flood at the unit prior to the tenant's occupancy; whether the property is located in a military zone; and local rent control rules. When in doubt, it is always best to disclose these and similar issues. Especially if the property is covered by rent control, make sure to research local regulations for required disclosures. These can be found on your city or county website, or by contacting the office of your mayor, city manager, county administrator, or a locally licensed attorney.
Rent-to-own lease agreements for mobile home tenants may have specific laws associated that are not included in the form for your state. Be sure to research your state's specific laws on mobile home site rental agreements to ensure your agreement complies.
A note on Wisconsin law: In Wisconsin, landlords are required to disclose any nonstandard provisions, if any, in a separate written document entitled "NONSTANDARD RENTAL PROVISIONS," which the landlord provides to the tenant (see Wis. Admin. Code ATCP 134.06). Therefore, if you desire to include any requirements for the return of the security deposit, any landlord's right to enter the premises not specified by law, or any other nonstandard provision according to Wisconsin law, then make sure to ALSO provide these provisions in a separate document in compliance with state law.
Once finished completing the agreement, simply have all parties sign and date where indicated. Be sure that all parties get a copy of the agreement to retain for their records.
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