Q: What happens in a lease option to buy when at the end of the 18-month period the buyer is unable to carry through with the buying? Does the buyer lose the deposit and the lease payments?

A: That's a very good question. It highlights some of the most important elements in all real estate transactions--namely that all terms should be negotiated in advance, and then reduced to writing.

You have entered into a lease with an option to purchase, and you are to exercise that option within 18 months of the date of the transaction. If you--or your lawyer--were on the ball when you entered into the transaction, you would have covered these points in the contract (lease). I assume that you entered into a written lease with an option, and that all of the important terms were spelled out in that document.

As a seller who enters into a lease option, I would want a sizeable down payment, and a monthly rental income which would not be credited toward the purchase price. In the event my tenant defaulted--did not go to final settlement--my preference would be to declare the entire deposit to be forfeited in my favor. The theory behind this strategy is that I am taking my house off the market for a period of time, and I am contracting to sell my house in the future at today's prices.

If I were the tenant who enters into such a lease option, I would of course want different terms. I would attempt to negotiate that all or part of the monthly rental payments would be credited toward the purchase price. Also, if I were unable to go to final settlement at the expiration of the lease, I would not want to lose all of my deposit.

Needless to say, you will need good negotiating skills, and the final agreement should be spelled out in writing, and signed by all the parties. This is a legal document, and since you will be living in the house for a period of time in accordance with the terms of this document, it should be carefully considered before you enter into the arrangement.

In the absence of language covering the situation you have raised, I suspect that you may end up in court. The seller will take the position that the deposit is forfeited; you will no doubt take the position that the deposit was merely a security deposit for the rental arrangement.

I suspect, however, that if the transaction is in fact a lease with an option to purchase, the courts will side with the seller.

You may also want to consider adding the following language to any such lease/option agreement:

"Any dispute arising out of this agreement will be decided by an arbitrator, in accordance with the rules of the American Arbitration Association."

If a dispute does arise and if you have an arbitration clause, the matter will probably be resolved quicker--and less costly--than if you have to go to court.