Real Estate Law
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I need a little more information about this situation before I can comment..
Are we talking about a lease with option to buy contract where the lessor pays "rent" for some period of time and then has the option to purchase at the end for a lump sum figure?
Or a land contract sale where the property is actually in the buyer's name with the seller holding the note on the property?
What does the specific contract state about what happens in the event of a default?
How long has the lessee paid on the contract?
How much of the purchase price has been paid?
Ok, then if you are asking if there is anything explicitly stated by state law or implied that would give the lessee the right to back out of the contract and get their payment money back, then unfortunately the answer is no. The written contract controls in a situation like this and if either party defaults, then the other party can hold them liable according to the terms of the contract.
So essentially the $20K was the "price" of buying the option to purchase after the lease expires. It is up to the lessee as to whether they exercise that option or not, but once purchased the option price is non refundable.
If the lessee can't complete the contract to purchase, then they might see if someone else might be interested in buying out the right to do so if the purchase of the property would be a good idea financially. The lessee could assign their option rights to a third party who could then purchase the property at the reduced price and then continue to rent it to the lessee..
That is unless the seller of the property is willing to extend the contract further for the lessee..
But to answer your question directly, no, state law doesn't intervene here to protect that option purchase money from being forfeit if the option expires.