This article discusses what happens to a tenant when they have a lease with an option to buy, they are in possession of the property, and during their lease the property burns down, suffers extreme water damage, or another similar event destroys the property at no fault of the tenant. In that event, can the tenant recover their money paid towards the purchase price if they're no longer going to buy the property?
DOCTRINE OF FRUSTRATION OF PURPOSE
The Tenant's obligation to pay rent or continue leasing the premises will be waived in the event there is an unforeseen circumstance that frustrates the purpose of the lease.
The doctrine of frustration of purpose applies when performance remains possible but the fundamental reason of both parties for entering into the contract has been frustrated by an unanticipated supervening circumstance, thus substantially destroying the value of performance by the party standing on the contract. As a result, party is excused from performing his or her duty under a contract, even though performance remains possible, if the fundamental reason of both parties for entering into the contract has been frustrated by an unanticipated supervening circumstance that substantially destroys the value of performance by the party standing on the contract.
The doctrine of frustration of purpose is a way for tenants to avoid having to pay rent, and can allow them to terminate the lease early without being sued for damages.
TENANT IN POSSESSION WILL LOSE THEIR MONEY PAID TOWARDS THE PURCHASE PRICE.
Under California's "Uniform Vendor and Purchaser Risk Act" a tenant who has an option to buy, was in possession of the premises, and was paying money towards the eventual purchase price will lose all the money that they put towards the purchase price:
"Any contract hereafter made in this State for the purchase and sale of real property shall be interpreted as including an agreement that the parties shall have the following rights and duties, unless the contract expressly provides otherwise:
(a) If, when neither the legal title nor the possession of the subject matter of the contract has been transferred, all or a material part thereof is destroyed without fault of the purchaser or is taken by eminent domain, the vendor cannot enforce the contract, and the purchaser is entitled to recover any portion of the price that he has paid;
(b) If, when either the legal title or the possession of the subject matter of the contract has been transferred, all or any part thereof is destroyed without fault of the vendor or is taken by eminent domain, the purchaser is not thereby relieved from a duty to pay the price, nor is he entitled to recover any portion thereof that he has paid." Cal Civ Code § 1662
Reading the frustration of purpose doctrine together with the Uniform Vendor and Purchaser Act, tenant can argue that they are relieved from continuing to have to lease out the premises or exercise their option to purchaser, however all the money that they have thus far put towards the purchase price remains the property of the landlord.
The Act can only be circumvented if the contract expressly provides for otherwise.
In Long v. Keller, 104 Cal. App. 3d 312, 314 A buyer of real property was not relieved from her duty to perform under the contract of sale after destruction of the property by fire, nor was she entitled to recover any portion of the purchase price already paid (Civ. Code, § 1662, subd. (b)), where she was in possession of the property at the time that it was destroyed by the fire.
The best way to avoid this result as a tenant is to make sure your lease agreement includes safety provisions like this at the outset!
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