When AI Adds Terms You Didn’t Say: The Lease-Option Trap
This article continues our discussion about the risks of using AI tools such as ChatGPT for legal research. One of the most common (and dangerous) patterns we see is when clients start with a legally viable strategy—then go looking for answers online, mischaracterize their own strategy with the wrong terminology, and end up concluding that the strategy is illegal or unworkable. Here’s a real-world example.
We recently advised a client on launching a nationwide lease-option program for investors. The strategy was sound: Their fund would own single-family homes to be leased to tenant buyers. Each tenant-buyer would pay an initial fee under a purchase option agreement, and also pay rent under a lease agreement, while also covering part of the maintenance costs. When the tenant successfully completed their lease and exercised the purchase option, the option fee and a portion of their rental payment would be applied toward their down payment. Until the tenant exercised the purchase option, the fund would pay all taxes, insurance and major structural repairs.
But after doing some AI research on their own, the client came back concerned. Their AI tools had told them that “NNN lease-options” were not legal in certain states. Suddenly, the client was worried that the entire program was off the table.
The problem? We never told them to use NNN lease-options.
They had inserted that language themselves—without understanding that “NNN” (triple net) actually means paying taxes, insurance, and all maintenance and repairs – which is often part of a commercial lease strategy, but not at all applicable to the residential lease-option program we had suggested. Their insertion of the term “NNN” sent their AI queries down a different path, triggering content about commercial lease structures, tenant repair obligations, and landlord-tenant law that had nothing to do with the strategy we recommended.
What They Should Have Asked Instead
- Can an investor offer a residential lease with an option to purchase, where the tenant agrees to maintain the property?
- Are there consumer protection or landlord-tenant laws that limit what maintenance obligations can be passed to a tenant in a residential lease?
- How do we structure the option and lease so they are legally separate and not considered a disguised sale or predatory lending?
What’s the Real Answer?
In most states, residential lease-options are permitted—as long as they are properly documented, the lease and the option are legally distinct, and the arrangement doesn’t violate local landlord-tenant or consumer finance laws.
The key is to structure the transaction correctly:
- Use plain language that distinguishes the lease from the option agreement.
- Avoid giving tenants burdens that would shift risk unfairly or violate state law (e.g., forcing them to pay for major structural repairs).
- Make sure investor obligations and tenant expectations are clearly defined and reasonable.
- Don’t use “NNN” terminology in residential agreements ; it only applies in a commercial context.
Conclusion
AI is great at surfacing general information. But it doesn’t know your intentions—and it can’t tell when you’ve used the wrong term for your actual structure. That small shift in phrasing can send you down a completely different legal path.
Before acting on what you find online—especially when structuring lease-options, investor programs, or any arrangement that crosses real estate, securities, or consumer protection law—talk to counsel who understands the full picture.
We’ve helped hundreds of clients create lawful, investor-ready lease-option models.
Be careful whose advice you rely on. A misstep in terminology can kill a strategy that was perfectly legal and cost you time, money, and lost opportunities.
