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Q: I’m interested in purchasing a home, but do not have much for a down payment. A friend of mine recommended a lease option. Can you explain how a lease option works?

A: A lease option is but one of many choices available when a seller and buyer want to be creative. Under a lease with an option to purchase, the owner leases the property to a tenant. The tenant has an option to purchase the property. All too often, one of the elements of the lease option is given short shift — either the lease or the terms of the purchase option.

A lease with an option requires careful drafting. First and foremost, it’s a lease between an owner and a tenant. The lease should contain all important landlord/tenant terms, especially those required by Florida Statutes. Second, deposit and advance rent must be handled in accordance with the Landlord Tenant Act and the lease should make it clear who is responsible for maintenance and repairs.

Frequently, a lease option is really a financing arrangement and the landlord expects the tenant to pay all of the costs of carrying the property until the option is exercised. A lot of landlords do not recognize that the tenant may not exercise the option.

Other times, the option arrangement is given short shift. It’s important that the agreement specify the manner in which the option is exercised, the deadline for exercise and all terms that will govern purchase if the option is exercised.

If the option is exercised, the agreement becomes a purchase contract so all terms of a purchase contract should also be referenced as part of the option. Those terms would include responsibility for various closing expenses, quality of title and provisions mandated by Florida Law.

For example, Florida Law requires that purchaser of a condominium have certain voidability rights. And, there can be a real conflict if the contract requires the property to be in good repair and the lease is ambiguous as to responsibility for maintenance.

Other matters should be considered, for example, is a separate fee to be paid for the option? Payment of a separate amount for the option is usually non-refundable but it might be applied toward the purchase price.

Will the parties agree to apply part or all of the rent toward the option purchase? In some cases, there is no separate consideration for the option, but the monthly rent is usually higher than what is otherwise paid. Part of the additional rent might be applied toward a down payment.

Because there are so many variables and legal requirements associated with both a lease and a purchase contract, it’s highly recommended that an experienced attorney draft the agreement. And, because there are many factors to consider, it’s also recommended that each party retain a separate attorney.

A lease with an option can also be structured as a lease with a mandatory purchase. Under this approach, the tenant is required to purchase the property. Under this structure it’s more important that both parties understand liability and options in event of default.

An alternative to a lease option can be seller financing of the purchase. Under seller financing, the parties agree on a down payment and, at closing, the buyer gives the seller a promissory note and mortgage in exchange for the deed. Usually, terms of financing require monthly payments as if making payments under a long term mortgage, with a balloon of the unpaid balance so that the mortgage is paid in full a few years after closing. This allows the buyer time to sell other property, reestablish credit or otherwise get to a position where financing can be obtained. The problem here is that the seller must foreclose the mortgage in event the buyer fails to make payments. For the buyer, the problem is obtaining financing before the balloon is due.

Seller financing can be flexible. It can even be used where the seller has a mortgage with a bank. In that event, a wrap around mortgage can be prepared under which the buyer pays the seller’s mortgage and pays any excess from each monthly payment to the seller. Even though most mortgages have a due on sale clause, the due on sale clause is almost never exercised. Most mortgages are sold to institutional investors such as pension plans and insurance companies. As long as the monthly payments are timely made, those investors do not really care if the property has been sold.

You may find the owner prefers an agreement for deed over seller financing or lease with an option. Under an agreement for deed, the buyer makes payments to the seller and, if the buyer does not default, the seller transfers title by deed when the last payment is made. Because the seller keeps title until all payments are made, some sellers believe they are in a better position. Many of these agreements provide that the buyer takes possession immediately but can be evicted like a tenant for failure to pay.

Under Florida law, the agreement for deed, also known as a contract for deed, is treated the same as a mortgage. The buyer gets equitable title, although not legal title, under an agreement for deed. Consequently, enforcement of an agreement for deed is governed by the rules applicable to mortgage foreclosure, which do not allow immediate eviction of the tenant or retention of title and forfeiture of all money paid by the buyer without court action.

There is more than one way to skin a cat when a buyer is not in a position to finance a purchase and a seller is willing to be flexible. Parties involved in such a transaction are well advised to consider all possible options and to understand the pros and cons.

In this area, retaining an experienced attorney is critical.

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William G. Morris is a lawyer with offices at 247 N. Collier Blvd., Marco Island. The column is not intended to be legal advice for specific circumstances. General questions can be sent by e-mail to wgmorrislaw@earthlink.net or by fax to (239) 642-0722. Read other columns at http://www.wgmorris.com.