Lease Options in Court

A former Rick Otton student, and witness in his Federal Court case, lost a lease-option case in Supreme Court of NSW (Australia) in December 2016.  The case shows, once again, the risks faced by owners, buyers – and even ‘creative property’ businesses – when entering lease option agreements.

Karin Siekaup is a former Rick Otton student, and the only former student who gave evidence for Otton in defending a misleading and deceptive complaint brought by the regulator (ACCC) in Australia.  [Update: In August 2017 the Court found that Otton had engaged in misleading and deceptive conduct.  It appears that Siekaup’s evidence in support of Otton involved two property deals – the two mentioned here which “fell over”.]

In November 2016, Siekaup was involved in a court case of her own, Sieve-Storm v Murphy. 

“Siekaup is the sole director of Sieve-Storm Pty Ltd,” and for the purposes of this article I refer to her by name rather than to the company, noting that the judge said “her mind must relevantly be the mind of Sieve-Storm”

Summary

Siekaup entered into two lease option agreements for two homes with the same owner, and appears to have ‘onsold’ the properties to third parties via lease options.  Around the time Siekaup tried to exercise the options, and thereby buy the properties for the initial agreed amount, the owner claimed that the documentation didn’t comply with NSW law, and cancelled the option agreements.  Siekaup tried to claim compensation from the owner but the court confirmed that the owner had the right to cancel the options, that Siekaup wasn’t entitled to compensation and ordered that Siekaup pay the owner’s legal costs.

The two lease option agreements

Siekaup entered two lease option agreements with a home owner in 2013. Siekaup paid the owner $1 for the right to purchase each home within two (or possibly three years) for an agreed price.  Until that time Siekaup would have access to the houses and the right to sub-let them.  Siekaup agreed to pay the loan re-payments and rates on the properties once she had access to the houses.  Both agreements gave Siekaup the right to find other buyers for each property, and to retain any difference between the price paid by those buyers and the price she agreed with Murphy.

Siekaup admitted in court that she received more money from third parties who occupied the properties than she paid out in outgoings and interest.  It is likely that Siekaup entered lease option agreements with potential buyers but details of those arrangements were not presented in court.  One of the key strategies taught by Otton is to locate desperate home owners and those unable to afford to buy, and to profit by acting as a go-between in setting up “creative property” deals.  Based on a number of cases I’ve seen; these deals often disadvantage the home owners and potential buyers.

It appears that the agreement for the first property was arranged without the involvement of lawyers.  It was drafted on a form contract for lease options.

The agreed purchase price for this property was $236,000.

Some months after signing the first agreement, Siekaup approached Murphy and asked if she had another property that she “wanted to sell via a rent-to-buy contract”.

The second agreement was drawn up on behalf of Siekaup and Murphy by their respective solicitors.  The terms of this second contract were similar to those for the first property, but the agreed purchase price was $235,000.

What was the dispute about?

Despite the fact that both parties had legal representation in relation to the second agreement, the documentation for both agreements failed to comply with the law in NSW, which resulted in either party having the right to void the contract.

A few years after the agreements were signed, and around the time Siekaup attempted to exercise the options (ie purchase the properties), the owner apparently sought legal advice and her lawyers sent a notice of rescission to Siekaup, cancelling the options on both properties.

Siekaup responded by issuing legal proceedings against Murphy.  Siekaup did not argue that the documentation was compliant, however she claimed compensation on the basis that she had suffered because Murphy had acted in accordance with the agreements, thereby leading Siekaup to believe that Murphy would comply with the agreements.  Siekaup claimed it was unconscionable of Murphy to refuse to proceed with the options.

Neither party used the lawyers who had been originally engaged to arrange the contract.  Siekaup appears to have been represented in court by the same law firm that represented Otton in his Federal Court matter.

Murphy was represented in the court case by Tony Cordato – a lawyer who has presented at many Otton seminars and has actively promoted lease options and vendor finance.  Cordato is noted as initially representing Otton in the early months of the Federal Court case.  Cordato has written a summary of Siekaup’s case here.

It appears from a web search that the first property may have sold for $385,000 in January 2017.   https://www.realestate.com.au/property/45-robertson-rd-killarney-vale-nsw-2261  If Murphy hadn’t been released from the lease option, she would have been obliged to sell the property to Siekaup for $236,000 – possibly leaving Siekaup with a substantial profit.

What was the outcome?

The court found against Siekaup, and ordered Siekaup to pay Murphy’s legal costs.

The role of legal representatives in the second contract

Siekaup engaged solicitor Jovan Sarai to act on her behalf in relation to the contract.  Like Siekaup, Sarai is also a former student of Otton, and promotes himself as having expertise in this type of property transaction.

On one of Otton’s many webpages, there is the following testimonial

“Jovan and Sally Sarai are among the many people who went to Otton’s events to learn about these innovative and creative strategies.  ‘We bought a $1.3 million house for ourselves to live without banks through lease options.  It cost us $15,000 upfront for deposit and a weekly payment of $1,125.  We are extremely grateful because this would not be possible with Rick’ ”.

The website of Safe Harbour Lawyers says “Jovan Sarai is active in promoting the Vendor Finance industry and often speaks on property investment seminars countrywide.  Please contact us to obtain our heads of Agreement (HOA) template and start your first Vendor Finance transaction today.” 

Shortly after the contracts were entered into in 2013, Siekaup posted on Sarai’s Facebook page “Thanks to you Jova…another deal done in no time…vendor and purchaser found and signed off within 4 weeks…Have never even seen the house…HOW good is this JOB we have! …”

According to Murphy’s affidavit, Siekaup told her that she’d found someone “to do the paperwork” and that Murphy needed to “sign the documents urgently”.  Murphy said that Siekaup made the appointment with Carmelo Ciampa and agreed to pay the legal fees.

Ciampa doesn’t hold a current solicitor’s practising certificate, but is a licensed conveyancer, and appears to have acted as a conveyancer in this matter.  Ciampa claims expertise in creative property transactions.  The Property Law Company’s website refers to Ciampa as “principal lawyer” and refers to “unusual (terms) deals” including lease options, as an area of work.  Ciampa can be seen on a youtube video promoting an “own don’t rent” savings program (although that program is not the business run by Siekaup).  https://www.youtube.com/watch?v=xvrWEBaRYG4

Ciampa encourages referrals on his website:

“We are referred clients from many different sources, but the one common element to these client referrals is that the referrer always has something at stake when they make the referral (and it isn’t always a financial stake).

Whether you are a real estate agent, finance broker, bank manager, accountant, concerned work colleague or simply a caring parent, the common feature for you as a referrer is that your reputation and/or financial well-being is at stake when you make a referral. 

At PLC we understand that the quality of service provided is not only important for the client, but is often of great importance to the referrer. For that reason, we treat the referrer as an important stakeholder and, to the greatest extent possible, we keep the referrer ‘in the loop’ so that they know what is going on and, wherever possible, have input into how the transaction is handled.

The reason we get client referrals is that we enhance the referrer’s standing, we give the transaction the best chance of ‘success’ and we keep them involved and in the loop to the greatest extent possible”

Can lease options work?

I have previously questioned whether, in practice, a lease option is likely to benefit a potential buyer, and the figures suggest not.  Of course in the case above, Siekaup would have benefited financially if the agreements hadn’t been void, but there’s a question about the extent to which the owner or any end-buyer would benefit.  Based on similar cases (and provisions in the standard form agreement used in this case) it is possible that anyone entering into a lease option with Siekaup would pay a significant option fee (well over the $1 she paid) and be paying a higher price for the house.  The fact that these two agreements were voided, may also void two other lease option agreements between Siekaup and potential buyers.  It is possible that they may be disadvantaged by the outcome of this case – but it is more likely that they will be better off if they are placed back into the position they were in before they entered into their lease options.

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This entry was posted in Rent to Buy, Rent to Buy Houses, rent to own, Rick Otton. Bookmark the permalink.

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