Due to challenges in the housing market, many landlords have been willing to finance the sale of their property to their tenants who don’t qualify for conventional loans. In addition to the cautions of seller financing from the Dodd-Frank Act (refer to articles from March and April 2014), it is important to be sure the contracts state the terms the parties actually intend.
In a recent case, Gongora v. Bowman (memorandum decision Ariz. App. 2017), Gongora, the property owner, agreed to “lease to own” his home to Bowman for a $15,000 initial payment and $750 per month for the 20 year option term or a total of $152,706 had been paid. They also executed a basic month to month lease agreement in which Gongora retained the right to cancel the lease and revoke the option to purchase, but would have to refund the deposit amount less any damages or repairs.
Bowman paid only $7,000 of the $15,000 initial payment, took possession of the property and Gongora recorded a deed to Bowman in joint tenancy with Gongora. Shortly afterwards, Bowman was arrested and jailed and failed to make any further payments. Gongora filed an eviction action and regained possession, then filed a complaint to void the joint tenancy with Bowman and for damages for breach of contract. The court voided the joint tenancy and ruled Gongora could keep the deposit. Bowman appealed, demanding the return of the $7,000, as there was no contract provision for Gongora to keep it. Gongora responded that those funds were either an earnest money deposit toward the purchase or an option payment; in either case, permitting the Seller to keep the initial payment.
The Court of Appeals overruled, holding that the contract provided for the return of the initial payment if Gongora terminated the agreement. The contract did not provide any grounds for Gongora to retain the deposit if he terminated the lease and revoked the option to purchase. Since ambiguous contracts are interpreted against the drafter, Gongora is stuck with the terms he created for himself. The Court stated, “our duty is confined to interpreting the agreement the parties have made for themselves.” The parties returned to the trial court on the issue of damages.
This case reminds us of the dangers of DIY contracts. While many buyers and sellers who find each other see no need to engage the services of a real estate agent or attorney, self-drafted documents often omit “legalese,” which turn out to be important terms and precautionary language. In the past few months, I have prepared or reviewed contracts for 3 deals where the buyer was either a tenant or acquaintance of the seller. The parties initially wrote up the terms themselves, then one or the other decided it was worth the attorney review. I can assure you it was less costly than the time and expense of litigation, appeal and a second trial!