THE RENT TO BUY “DEAL”
No matter what your “rent to buy” contract might say, if it quack’s like a lease, and walks like a lease, then it must be a lease. If it’s a lease, then you’re either a landlord or a tenant.
Many people are attracted to ads that offer to sell them a home on a “rent to buy” basis. These arrangements have become more popular as the requirements necessary to secure conventional mortgage financing became more difficult to satisfy. Recently the Indiana Supreme Court addressed the enforceability of one particular buyer/seller agreement, and its decision will no doubt go a long way toward protecting buyers who might otherwise enter into such oppressive contracts. In the Rainbow Realty vs. Carter case, the Indiana Supreme Court held “the parties’ “rent to buy” agreement is not a land-sale contract, but a rental agreement subject to Indiana’s residential landlord tenant statute.
The “buyers” in the Rainbow Realty case entered into a “rent to buy” agreement which contained contractual features that appeared similar to a land-sale contract, but which also included features similar to a lease. The general concept of the agreement was to allow the “buyers” to make payments toward the purchase of the property, while granting the Seller all the controls of a Landlord. When tenants fail to pay rent, landlords simply sue for eviction and recover possession, unlike sellers in a land-contract, who must go through the long and expensive process of a foreclosure action. In a foreclosure action the seller sues to foreclose on the land-contract just like it was a mortgage. The Seller must secure a judgment against the buyer(s), have the Judge send the real estate to a sheriff’s sale, where it will be sold to the highest bidder. Rainbow Realty wanted have its cake and eat it too. If the “buyer” defaulted, they wanted to take back the real estate as though they were the landlord. The trial court refused to enforce that contractual option and the Supreme Court ultimately affirmed that ruling.
The Supreme Court found the contract was essentially a lease, because it did not give the buyers equitable title while at the same time the seller retained the right to evict and recover possession. With those features written into the agreement, the seller was exerting too much control over the buyers. The fact the home had no running water, or heat, and was essentially a bug and rodent infested shell of a house convinced the Court the sellers were actually landlords who had violated Indiana’s residential landlord tenant statute.
For sellers of real estate in Indiana, this decision serves as a warning to avoid the pitfalls of a written agreement that looks like a lease while including terms similar to a land-contract. For buyers, this decision serves as a measure of protection for them against sellers wishing to engage them in oppressive real estate transactions.
Rob McNevin is a real estate attorney located in Indianapolis who has been practicing since 1995. He is a partner with McNevin & McInnes, LLP with years of experience in real estate and construction related matters.
