What judicial remedies available under lease-option agreement?
Full Question:
Answer:
I intend in this response to deliver legal information about the law generally as it may apply to your area of inquiry, and NOT to give legal advice about the situation described in your inquiry.
As a potential lessor and seller of real property, you are prudent to think about the legal remedies that may be available to you in the event the lessee/optionee defaults on the lease/option-to-purchase agreement. But, be aware that both forfeiture and foreclosure are judicial remedies that are equitable in nature, and that the expedited right to possession offered by statutory FED proceedings generally is not available to a lessor/optionor if title to the real property is actually or potentially at issue. What that means in everyday English has historiically been expressed as maxims of equity, namely: "Equity abhors a forfeiture"; "One who comes into equity, must come with clean hands"; "He who seeks equity, must do equity"; Equity aids the vigilant, not those who sleep upon their rights." There are numerous other maxims of equity, but the point is this: the law views each parcel of real estate as unique; judges historically and currently use the maxims of equity to limit or circumscribe judical forfeiture or foreclosure of a tenant's or purchaser's interest in real property, particularly residential real property. Many states have enacted legislation that limits the forfeiture and foreclosure remedies available to lessors or sellers of residential real property. Many states have enacted residential landlord/tenant legislation that to a lessor/landord may seem punitive. The tenant in the situation you describe would appear to be entitled to the tenant protections offered by Arizona's landlord/tenant statues. Of equal significance is Section 365 (a) of the United States Bankruptcy Code; Section 365(a) provides that "Except as [otherwise] provided * * *, the trustee, subject to the court’s approval, may assume or reject any executory contract or unexpired lease of the debtor." If the tenant/optionor described in your inquiry were to file for bankruptcy protection under any chapter available to a consumer debtor, then the trustee in bankruptcy at the trustee's sole discretion may affirm or reject the unexpired lease, and will have a substantial period of time to make that decision during which you as lessor will receive no installment payments and will be entitled to no interest on the indebtedness. Moreover, the terms of the agreement will be subject to a"cramdown" under the Bankruptcy Code in any consumer bankruptcy proceeding; a "cramdown" is a material and substantial alteration of the agreement that is approved and ordered by the Bankruptcy Judge and that is always to the creditor's detriment.
If this real property is a significant asset in your personal finanacial portfolio, then you need the advice of an experienced Arizona real-estate lawyer before entering into a lease/option-to-purchase agreement with regard to that property. The State Bar of Arizona maintains a "Find a Lawyer" webpage; the link appears below.
General descriptions of some of the legal concepts mentioned in this response include the following:
Equity. Equitable refers to something characterized by fairness, impartiality, or lack of bias. '''Equity''' is the name given to the whole area of the legal system in countries following the English common law tradition that resolves disputes between persons by applying principles of fairness and justness. Courts of equity apply equitable principles to grant equitable remedies, such as injunctions or decrees directing someone either to act or to forebear from acting, while courts of law apply the law to award money damages. In the U.S. today, the federal courts and most state courts have combined both law and equity in the same courts, so a plaintiff can get legal and equitable relief in one proceeding.
Forfeiture. Forfeiture occurs when a person gives up money, property, or privileges to compensate for losses resulting from a breach of a legal obligation
Foreclosure. Foreclosure is the procedure by which a party who has loaned money secured by a mortgage or deed of trust on real property (or has an unpaid judgment), forces the sale of the real property to recover the money due, unpaid interest, plus the costs of foreclosure, after the debtor fails to make payment. The lender must serve a notice of default on the debtor after a certain time period from when the payment becomes past due, which varies by state. The notice will give the borrower a certain time period and amount necessary to be paid in order to "cure" the default and avoid foreclosure. If the delinquency and costs of foreclosure are not paid within this time, then the lender (or the trustee in states using deeds of trust) will set a foreclosure date for selling the property at public sale. The property may be redeemed by the borrower by paying all delinquencies and costs, up to the time of sale and in some state, for a period after sale.
There is also judicial foreclosure which is used in several states with the mortgage system or in deed of trust. This procedure is used when the amount due is greater than the equity value of the real property, and the lender wishes to get a deficiency judgment for the amount still due after sale. However, some states give deficiency judgments without filing a lawsuit when the foreclosure is upon the mortgage or deed of trust.
A buyer who makes less than a 20% down payment will typically have to pay for foreclosure insurance, called private mortgage insurance (PMI), which will pay the bank if the home gets foreclosed on. Some of the leading causes of bankruptcy have been cited as overspending, loss of employment, predatory lending practices, divorce, and medical emergencies.
It is suggested that a person in risk of foreclosure try to work with the lender to prevent the foreclosure. The lender may be willing to give the borrower extra time to pay, or may suggest debt counseling to restructure or consolidate the debt. It may be possible to create a trust account to protect the debtor's assets, or rework the loan for an extended period of time to lower the monthly payments. The past due amount could be added into the new loan. A debtor will sometimes sell the home to pay off the delinquent amount. A voluntary foreclosure involves selling the home to the lender. Voluntary foreclosure may be pursued to minimize the damage to the debtor's credit record associated with involuntary foreclosure. In a voluntary foreclosure, the debtor not be held liable if the home sells below the debt amount. Due to the loss of financial control and credit damage involved, bankruptcy is generally viewed as a last resort to avoid foreclosure. In bankruptcy cases, the lender is entitled to apply to the court for relief from the automatic stay to allow it to continue foreclosure proceedings.
After the sheriff sale, the bank will have to request that the court order the former owners and current unlawful occupants to be evicted from the house. Usually all that is required to get an eviction order is proof that the title was transferred on the day of the sheriff sale. Therefore, as the new owner, the lender has the right to determine who lives on the property. After the foreclosure victims have exhausted their options to stop foreclosure with no success, and the sheriff sale has been conducted, the eviction process will typically begin very soon.
Other types of foreclosure include foreclosure by power of sale and strict foreclosure. Foreclosure by power of sale is allowed by many states if a power of sale clause is included in the mortgage. This process involves the sale of the property by the mortgage holder without court supervision. It is generally quicker than foreclosure by judicial sale. Strict foreclosure is a process available in a few states which allows the mortgagee to petition the court for foreclosure, and if granted, the court will require the mortgagor who is behind in payment to make payment within a specified time. If the mortgagor fails to do so, the mortgage holder gains the title to the property with no obligation to sell it. This type of foreclosure is generally available only when the value of the property is less than the debt.
When the lender makes a motion for an eviction order, the foreclosure victims have an opportunity to raise any violations of required procedure in their defense. Procedures vary by jurisdiction, so local law needs to be consulted. The owners will always get a chance to respond to any motion the bank makes in court, and the lender's attorneys often violate some rule of procedure, which include state laws, county rules, and specific court rules. However, the foreclosure victims need to consider whether they want to answer every motion the bank brings and drag out the process, which will increase the legal fees that will eventually be added to the total payoff.
Cramdown. Cramdown is a term used in bankruptcy law to refer to the Chapter 13 provision that allows debtors to retain collateral as long as they offer repayment of the “secured portion” or fair market value of the collateral in their repayment plan. For example, bankruptcy law permits a debtor to reduce his/her car payments if the replacement value of the vehicle is less than what the debtor owes to fully pay off the vehicle. The balance of the indebtedness that exceeds the fair market value of the collateral is considered to be unsecured and is placed at the lowest priority of payment.
The effect of the cramdown is to reduce the amount of the secured claim to the value of the property at the time the bankruptcy plan is confirmed, to provide the debtor with more time to pay the loan, and to reduce the rate of interest to the prime rate. For example, a two (2) year loan of $8,000.00 at an interest rate of 16 percent may be reduced to a claim of $6,000.00 payable over a period of six (6) years at the prime interest rate. If the debtor decides he doesn’t want the car anymore, he can simply stop paying the trustee and abandon the plan. There is no penalty for a debtor who doesn’t live up to the terms of the bankruptcy plan.
Please see the information at the following links:
http://www.azbar.org/LegalResources/findlawyer.cfm