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When a Contract for Sale of Real Estate is Also a Lease – Seller’s Guide to The Right to Unlawful Detainer

California real estate purchase and sale contracts often incur in conjunction with a written lease, such as in the case of a lease- option or both a lease and a contract entered together that reference each other. The lease-option includes a purchase contract that with instructions in the option as to how to exercise the option and make the purchase contract binding. The combo lease-contract will (at least should) be clear as to what payments are exclusively applied to the rental, and what rights the owner has to evict the tenant-purchaser. Sacramento area real estate attorneys frequently prepare these types of agreements usually in cases where the buyer-tenant cannot immediately obtain financing to buy the property outright. In a recent case with perhaps a too-complicated purchase contract, the defaulting buyer was disappointed to find out that it was really a tenant. Maybe it was complicated in order to disguise the fact from the buyer, but the court provided a guide to create such a deal while ensuring the seller can evict the buyer.

Sacramento commercial lease attorneyIn Jon Taylor v. Nu Digital Marketing Inc., Taylor was the owner and seller, Bu was the buyer. They entered a document entitled “Contract of Sale Residential Property.” It required the buyer to consummate the sale within 60 months by payment of $1.25 million. It also required (full details set out at the end of this article) that the buyer make “Probationary Installment” payments of $2,300 per month for 60 months, which covered the seller’s adjustable rate mortgage, and would increase if the mortgage adjusted. None of the probationary installment was applied to the purchase price. It also required a down payment (“additional Probationary Installment” of $500 per month. Lastly, it gave buyer immediate possession of the property and provided that if the buyer defaulted on probationary payments, the seller could serve a five-day notice.

Auburn commercial lease attorneyThe buyer defaulted, and the seller brought an unlawful detainer. The buyer claimed that it could not be evicted, because this was a contract, not a lease. The court of appeal disagreed.
It first noted that the relationship between the parties is characterized by reference to the rights and obligations of the parties and not by labels. So long as possession is obtained through the landlord-tenant relationship, unlawful detainer may be used. Rent that is credited against a purchase price alone does not create a buyer-seller relationship.
Here, the key factor was that possession of the property was conditioned on payment of the probationary installments, which only entitled the buyer to possession, and was, therefore rent. Importantly, none of these payments were applied to the purchase price. In addition, the contract provided for service of a five-day notice. Lastly, to the extent the provision was ambiguous the court admitted extrinsic evidence to resolve the ambiguity. This evidence included emails in which both parties referred to the payments as rent.
Query – how was this different from seller financing that required interest only payments for 60 months, followed by a balloon payment?

Sacramento real estate contract attorneyDETAILED PROVISIONS OF THE AGREEMENT

Paragraph Two purported to divide the purchase price into five components: (1) a grant of equity in defendant corporation (referred to as the “Equity Grant”); (2) payment of all property taxes and insurance costs from the move-in date; (3) payment of all Home Owners Association fees and any related penalties or special assessments; (4) the “Down Payment” we describe below; and (5) “Probationary Installment” payments of $2,300 per month for 60 months (also referred to as “Probationary Payments”). The paragraph also provided the probationary installment payments “will increase by any increase in the payment on [the plaintiff’s] adjustable rate mortgage,”

Paragraph Three provided: “Buyer shall have the right to possession of the Property … from the day (i) Buyer has paid to Seller the Probationary Payment, and (ii) delivered to Seller a fully-executed copy of this Agreement, and (iii) delivered to Seller the Equity Grant, and (iv) Buyer has deposited the Additional Probationary Installments.