ANOTHER WEIRD DECISION

Re. Lease Options
By Bill Gatten

In a nutshell, what happened in this case was that the Option term was overshot by nearly 3 months before any attempt to exercise it took place: but the Optionor was none-the-less forced to sell at the original option price. The court mandated this sale, even though (and partially because) the property had increased in value by $54,000. The Optionor (owner) in this case was even directed by the court to refund all moneys having been taken for insurance and property tax over the term of the purchase option, and also to pay reasonable attorneys fees to the optionee on top of it all.

I have researched the data through the defendant in the case, one of the brokers involved and an attorney friend of mine who happens to know someone involved in the case (knows the uncle of the cousin of the plaintiff's next-door neighbor's former boyfriend’s Gardner’s uncle).

Here's the deal as told to me and verified by direct interviews with two of the parties involved and the others mentioned above:

On December 1st, 1997, Party A (a seller) accepted a PACTrust™ Purchase Offer from Party B (the buyer) which was to have commenced on, or about the 18th of the same month, and which was to have include payments for PITI+HOA and a monthly Trustee Fee. The property was deemed to have been worth $195,000 at the time, but the property owner accepted a PACTRust™ Mutually Agreed Value of $181,000. Their real estate broker informed the seller that Party B had filed a bankruptcy in the recent past, and that their former home had been deeded to a relative to protect it from the bankruptcy proceedings.

On December 18, a new agreement…a Lease Option…was drawn up in lieu of the PACTrust™ because the buyer’s attorney didn’t under it and said that a Lease Option would do the same thing and be simpler. This change was initially rejected by Seller; but being faced with the expense of re-marketing the property, relented and accept the Leaser Option alternative. Party A indicated that the Lease Option would become effective only if there was a full Escrow, and then only upon the official closing of such Escrow. However, the Escrow was never opened due to the hesitation of the Optionee to bring in all the required monies…again the sellers relented and allowed the Lease Option to begin without an escrow process.. It was clearly understood by all parties at that time that a balloon payment relative to the financing on the property was coming due in full on 08/01/99 (about one year and eight months later).

1/98 - The first payment and partial option fee was several weeks late ion coming. The hazard insurance and the HOA were not paid by the occupant for 2 months.

2/98 - Option Agreement (retroactive from 12/18/97 to 12/18/98) finally executed by Optionor, but never acknowledged by Optionees.

A year goes by…

12-18-98 - Option Agreement terminates. There is no offer or effort to exercise the option to buy.

2/1/99 - Property had gone up in value from $181,000 to approximately $235,000 (good upswing in Ca. Market). Over the term of the Option Agreement, the monthly payments had invariably been 1 to 2 months late (to the detriment of Optionor's credit record) and paid only after “nagging and begging” by the Optionor. Likewise, the Homeowner’s Association dues were always 2-3 months late. The hazard insurance carrier threatened cancellation for non-payment on at least one occasion. On various occasions, Party A had to pay HOA dues our of their own pocket in order to avoid a lien being placed on the property by the association…an act that would end up biting them butt-wise (as it were) later on.

2/15/99 - Party B (now a rental tenant on holdover) was notified of the planned sale of the property by Party A, who, feeling sorry for them and their financial condition, offered to return Party B's original option fee (about $3,500). Party B then became aware of the value of the house, and sought out an attorney (a partner in the law firm of Tyler and Dorsa, Temecula, Ca). This firm, I'm told, sued for their client’s (Party B's) right to exercise the Lease Purchase Option, even though the option date had bypassed by over three months.

Party B’s claim was that they had been iunder the impression that they had obtained a financing commitment at 85% LTV just prior to, or just after approaching the law firm; but were subsequently turned-down by the lender when it was discovered that a house they had formerly owned had been foreclosed upon. It was also discovered by at that time that Party B was in the midst of an "eviction" and UDT Action: it is rumored that to hide the property from their BK they had moved a relative into it, whom their lender thought was the borrower… (this info is not confirmed, however).

Next, Party B made a Purchase Offer to Party A for a sum, which would have given Party A about $10,000 cash. That offer was rejected and followed with a counter offer for an amount that was $10,000 under market. Party B rejected the counter.

The suit that then ensued was based upon: "The detrimental reliance of Party B upon an oral modification of the original Lease Option (purportedly an oral Agreement to Extend…which Party A insists was never proffered, but which the Realtor for Party B insisted at the hearing had been made)." Interestingly, the Lease Option contract contained an estopple strictly forbidding any reliance upon ANY oral modifications to the Agreement (but that didn't matter to our "pioneer law maker, semi-retired" judge/arbitrator).

Now, Party A, in order to avoid the minimum of a one year delay that a court hearing would no doubt entail, agreed after the failure of their UDT, to Arbitration. The arbitration hearing was overseen by one Judge Kenneth Ziebarth Ret. (retired, but still sitting on the bench in San Juan Capistrano) and concluded by "J.A.M.A. Endispute" at the rate of $240 per hour (including the Judge's research).

5/4/99 Judgement rendered in favor of Party B. The judge's statement was that "Even in view of the caveat prohibiting reliance upon oral modifications, there must have been acceptance. Why on Earth else would Party B not have exercised an Option that would clearly give them $54,000 in equity in a property in which they had been diligently making payments on for over a year?" The order was for Party A to sell to Party B at the price of $181,000 (the original Option Price); and to give Party B 60 days in which to arrange for financing. And since the Option itself did not contain a provision for HOA dues and insurance, Party A is now also to refund all such sums paid by Party B. The fact that Party B was not responsible for the HOA dues was, of course, evidenced by Party A's having paid them on several occasions. They are also directed to pay court costs and all of plaintiff's reasonable attorney's fees (so I am told).

It appears that a Hard Money lender has now agreed to loan 75% on the property, without any consideration for credit, credit history or the former BK and eviction record. It is apparent to all concerned, however, that once the sale does take place, Party B will be forced to default and lose the property to the hard-money lender: at this point they are believed to be virtually "stone broke." They haven’t even enough even for Closing Costs, and have never, it is said, had enough money to even cover their lease obligations on a timely basis, much less the new mortgage payments which will be considerably higher.

Closing Costs? No problemo. Party B has indicated that they plan to cover their Closing Costs with the settlement money from Party A. And Party A has a taped recorded message from Party B indicating that if Party B's payment record is revealed to the new prospective lender, that they (Party B) will tie up the property beyond the call date of the existing loan, and notify the lender that the house is not owner-occupied (a provision of reinstatement of the 5 year call date).

How do you spell, "This deal sucks?"

Bill

In answer to those who are asking the question, Mrs. A tells us that she and Mr. A would now “give anything” to have had the foresight to have insisted on the original PACTrust™ offer as originally proposed. It would have made Party B no more than a tenant in the property and easy to evict without the claim equity, options or ownership rights per-se (even though all the "primary benefits of ownership” would have been held fully in tact for the resident beneficiary).

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