Are lease options legal in the UK and are they a good idea?
You may have come across the idea of a lease option. This article looks at the legality of lease options in the UK and whether lease options are a good idea or not.
If you are trying to sell your house and need to achieve a certain price. If you are in the difficult situation where you really can’t reduce the sale price of your house; Is selling your house on a lease option a good idea for you? A lease option will usually allow you to sell your house at the price you’re looking to achieve. A lease option will give you the opportunity to move on. They avoid you becoming a landlord and having to rent out your property to tenants yourself.
What is a lease option?
If you are new to the term ‘lease option‘, let me explain what a lease option is.
A lease option is a contract which incorporates two elements. These two elements are a ‘lease‘ and an ‘option‘. Lease option contracts means that a buyer pays you an upfront amount so they have the right to buy your home in the future. Let’s expand on these in more detail.
The ‘lease‘ element of a lease option contract
A lease is a legal contract which provides for a formal lease between the ‘purchaser‘ and the ‘seller‘ of a house. The lease contract element provides for an agreed amount to be paid on a monthly basis over the term of the contract.
The amount to be paid on a monthly basis is what’s agreed between the ‘buyer‘ and the ‘seller‘ of the property. In most cases the monthly payment amount is at least equal to the monthly mortgage payments on the property.
A lease contract of this nature can be used in both residential and commercial property in the UK. But for the purposes of this article, I’m going to focus on residential property.
The ‘option‘ part of the lease option contract
An option contract is something that’s been around since the dawn of property law in the UK.
Whilst options are more commonly used in commercial property transactions, in this article I’m only going to focus on residential property in the UK. But having said that, the same principles apply if you own a commercial property too.
An ‘option‘ gives you the right to purchase property, and is paid for as part of a contract. For an ‘option contract‘ to be legally binding, an option fee must be paid upfront. This option fee can be as low as £1 or as much as both parties to the option contract agree.
This is where the idea of buying a property for £1 comes from, as it’s possible to enter into a legally binding property option contract for just £1. You may be wondering why someone would agree to an option fee of just £1.
There are reasons for it, but the option fee is only a part of the option contract. Before the property can change ownership, the final option contract price needs to change hands. This is called exercising the option, (see below).
The option needs to be exercised for the property to be purchased
In order for the property to be ultimately purchased by the ‘buyer’, the option contract must be “exercised“.
The “exercise” of the option normally requires notice and payment of the final contract price, which would have been agreed at the beginning of signing the option contract.
The combining of two elements into a lease option
A lease option is quite simply a contract which combines an ‘option‘ with a ‘lease‘ into one contract. Which put simply means that the ‘option‘ affords the buyer ‘control’ over the property until such time as they want to exercise the option. Whilst the ‘lease‘ provides for an amount to be paid by the buyer to the seller during the option term.
As already mentioned, all the terms of the lease option are agreed up front by both parties. A lease option will not go ahead unless is works for both the ‘seller’ of the property and the ‘buyer’ of the property.
The lease option contract is always drawn up by a solicitor and both sides must have representation by a solicitor. Not all solicitors are familiar with lease options, so in order for this to work, it’s necessary to find a solicitor who is experienced in lease options.
Be aware of solicitors or financial advisers who unnecessarily disregard options as a scam or otherwise. Lease options entered into with the right investor are perfectly safe, above board and legal.
If you work with a reputable person, lease options provide a way for you to sell your property quickly in circumstances where this would not be the case.
But just in case you’re wondering are lease options legal in the UK, yes they are legal.
More Reading: Are lease options legal in the UK
What are the elements to a lease option deal?
For a lease option to work, it needs three components to the contract. If you are considering the idea of selling your house on a lease option, don’t worry to much about fully understanding how they work.
Start by understanding the principle to begin with. But we are happy to explain this in more depth if you contact us for more information.
But one of the other important takeaways from this article, is to understand that with each element of a lease option is up for negotiation and agreement between you the ‘seller‘ and us the ‘buyer‘.
Element #1 to a lease option contract – the option term
The first element to a lease option is the length of the option contract or rental period/lease term. This is the period between when the rental period begins and when the ‘buyer’ has to exercise the option to finally buy the property from you.
The option period can be anything from say six months to 10 years or anything in between. It can be longer and it can be shorter of course. It is usually never any longer than the term left on your mortgage.
Element #2 to a lease option contract – the option fee
For any contract to be binding in UK law there has to be ‘consideration’. What this means is that money has to pass between the buyer and the seller of the property. This means that the option fee needs to be at the very lest £1.
There are many lease options set up using a £1 option fee. However, the amount of the option fee is what forms part of the negotiation. For example, the option fee might be made up of what you require as your deposit for your next house purchase.
The option fee can quite easily be equal to the equity you have in your house. But equally, it could also be anything you are able to agree with the buyer, which in this case could be us.
Element #3 to a lease option contract – the option strike price
The third element to a lease option is what is agreed between the buyer and seller on how much is to be paid for the house either during or at the end of the lease option term.
This is usually called the ‘strike price‘. Once more the strike price is up for negotiation on both sides.
What usually impacts the strike price includes:
- The length of the option agreement term.
- What the house is worth currently, and;
- The outlook on property prices in the future.
This is where the buyer takes the most risk. If the buyer agrees a strike price that is above the present true market value, the buyer is hoping that property prices will go up over time. The greater the difference between the current market value and the strike price, usually the longer the lease term.
As a protection to the buyer, it’s normal to build-in the ability to extend the lease option term. This is only fair, as it would not be reasonable to expect the ‘purchaser’ to buy a house at a price above what it’s worth at the time of purchase.
Element #4 to a lease option contract – the option lease or rental amount
The fourth and final element to a lease option is the amount that is agreed to be paid on a monthly basis between the buyer and the seller. In most cases this is usually agreed to be equivalent to the mortgage payments on the sellers mortgage.
But as with all the other elements to a lease option, this is also negotiable between the buyer and the seller.
What are the benefits of selling your house on a lease option?
There are many benefits to selling your house using a lease option.
Benefits of selling your house using a lease option include:
- The lease option process is quick so you can sell your home fast!
- You can sometimes achieve an asking price in excess of what your house is worth.
- Provides a fast and effect solution to anyone going through a repossession process.
- A great solution for your to get your deposit money for another home and fast.
- You avoid some of the other solutions to where you can’t sell your house.
The above lease option benefits in more detail.
1. The lease option process is quick so you can sell your home fast
One of the main advantages of using a lease option to sell your home is the speed at which they can be set up.
You need to use a solicitor who is familiar with lease options. But assuming this is the case, the option contract can be drawn up and agreed extremely quickly. Sometimes within weeks.
2. You can sometimes achieve an asking price in excess of what your house is worth
It could also be that you’re struggling to sell your house for what you owe. The benefit of a lease option is that the option fee can be set at what you owe. This is even if your house isn’t worth this at the time. But then the lease term will need to reflect the period the buyer expects your home to increase to this level.
3. Provides a fast and effect solution to anyone going through a repossession process
As already explained, a lease option is fast and the lease option terms are up for negotiation. The buyer (i.e. us) are looking to help you the best way we can. If you are in the middle of being repossessed, you need to act fast.
We would work with you and your mortgage lender to sort out and stop your repossession so you avoid being repossessed altogether.
4. A great solution for your to get your deposit money for another home and fast
Subject to the other terms of the lease option and how the deal works for the buyer (i.e. us), within reason the option fee can be equal to your deposit money you require for your next house purchase.
Of course the lease option deal needs to work for us as the buyer too. But within reason this can normally be achieved. All the elements to the lease option, as listed above, need to work for both sides of the agreement.
That means that if you are looking for £x as your deposit money, which is what equates to the up-front option fee, the rest of the deal needs to ‘stack-up’ for us too.
5. You avoid some of the other solutions to where you can’t sell your house
In this article, ‘What happens if you can’t sell your house‘, there are some solutions that may not work for you. This is of course if the reason why you’re reading this article is that you’re finding it difficult to get rid of your house.
This might be that you don’t have the funds to do the necessary repairs to your house. Or it might be that you can’t afford to drop the price for your house to sell quickly. You may not like the idea of selling at way under market value to a cash investor.
But whatever the reason why, lease options is a viable alternative that works well for both parties.
In a lease-option the property owner and tenant agree that at the end of a specified rental period for a given property, the renter has the option of purchasing the property.
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