Avoiding The "Equitable Mortgage"

by William Bronchick, Esq.

"I Have An Equitable Interest In The Property"...

Tenant/buyers who default on a lease/option do not always go away quietly. Sometimes, they fight the eviction and go into court kicking and screaming, "I Have An Equitable Interest In The Property." What they are arguing is that the lease/option is not a landlord/tenant relationship, but rather a seller/buyer relationship. If the Judge agrees, your lease/option is "re-characterized" as an installment land contract. This may require you to foreclose the tenant, not just evict him.

Here Are Some Tips For Avoiding The Equitable Mortgage:

Use Separate Agreements: Give your tenant a lease and a separate option agreement. Make certain the lease does not refer to the option. More than 75% of the time, the tenant loses his paperwork.

 

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Keep Your Term Short: Do not give tenants more than one year lease/options at a time. If the tenant insists on three years, give him a one year with 2 rights to renew. Draw up a brand new lease and option agreement each time he renews. If you give a cumulative rent credit, raise the purchase price each time.

Take a Security Deposit: Sellers don't take security deposits, landlords do. Make it look like a landlord/tenant relationship, even if the security deposit is small.

Pay the Taxes and Insurance: Do not let the tenant pay the taxes and insurance. This makes it look like a sale.

Don't Give Large Rent Credits: The more "equity" the tenant has, the more likely a judge will favor an equitable mortgage

Watch Your Language: Refrain from using the words "credit," "seller" and "buyer" in your agreements. Instead, use the words "non-refundable option," "landlord" and "tenant."

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