How does a Land Contract work?

Quote from: mtnwizard on February 20, 2006, 09:17:21 AM

What do our Lawyers Say?

We asked our attorneys to look at these new Texas laws and analyze them for what they’re worth, while understanding clearly that such laws are not intended to prohibit the formation of trusts or the letting of one's own income property. Our type of conveying is not of realty but personalty, and does not pertain to the execution of a contract to purchase real estate.

An analogy might be that of the leasing of a car wherein the lessee has virtually 100% of the benefits of ownership of the car without a title transfer; but does never own the vehicle until/unless he or she would decide to buy it for its Fair market value at the termination of the agreement. The lessee has the first right to purchase, but is under no obligation to do so, and receives no more of a contracted bargain price than would anyone else buying the same car if the lessee opted not to.

The "substance over form" argument should come into play only if the simultaneous contracts were fully dependent upon one another to accomplish a stated objective. In our case, the lease agreement and the trust document are independent of one another.

If the first right to purchase clause if of particular concern, I might suggest something like:

"When the trust property is offered for sale upon the trust's scheduled termination date, such offering shall be at no less than full fair market value as determined by a bona fide MAI appraisal, or by any other means of evaluation mutually acceptable to the trust's beneficiaries. The right to purchase the trust property at that value shall first be offered to any beneficiary who would, at the time of termination, be a resident in the trust property: following which, prior to an offer for sale on the open market, the right to purchase at the then fair market value would go to any other beneficiary making the highest offer."

. . . we have run across this problem before, and the resolution is an easy one; that is, the hurdle that we have had to overcome in many of these cases has been that these transactions look to the untrained eye like sales-leasebacks, but they aren't. The Texas law deals with sale-leasebacks and not transfers to Trusts followed by leases either to a beneficiary or a third party. In other words, in these transactions, there is no "sale" which helps to avoid the due on sale clauses and tax reassessments.

Further, rights of first refusal and options are different things as well. A right of first refusal means that if a seller receives a bona fide confirmed offer from a third party, the person holding the right has the opportunity to match that bona fide offer, however, there is no obligation by the seller to sell to the person holding the right for any amount other than the bona fide amount. An option is a contractual right held by the optionee that requires the seller to sell the property for a certain price dictated by the option.

In our scenario, the beneficiaries only have rights of first refusal, not options. I believe the language is fairly clear in that regard, but if there is any question, it could easily be resolved by including language along the lines of "Nothing in these documents shall be construed to create an option by any party unless expressly set forth herein."

Thanks

ROBINSON & SCHMIDT
David M. Robinson, Esq.

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"I concur wholeheartedly with Mr. Robinson in each of his conclusions."

Martin R. Slater | LAW OFFICES OF MARTIN R. SLATER |

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Just in case it happens to dissapear.

John $Cash$ Locke