Land Contracts Generally
A land contract is traditionally defined as a conditional real property sale agreement. Black’s Law Dictionary 320 (Bryan A. Garner ed., West 1999). This agreement generally occurs when a buyer buys a property, but obtaining title is conditioned upon paying the entire purchase price plus any other interest and charges, as applicable. In Indiana, pursuant to Skendzel v. Marshall, 301 N.E. 2d 641 (Ind. 1973), land contracts are to be treated as notes and mortgages, which require the prosecution of a foreclosure action and a foreclosure sale upon default as opposed to the remedy of forfeiture. This foreclosure vs. forfeiture distinction is an important one as forfeiture, which is similar to an ejectment or eviction of a tenant, is not normally an available remedy against the defaulting land contract buyer.
There have been multiple cases over the last few years addressing the structure of land contracts and the handling of the resulting default. Specifically, what method of repossession, (i.e. Foreclosure v. Forfeiture), is an acceptable remedy. In Rainbow Reality Group, Inc., and/or Cress Trust v. Katrine Carter and Quentin Lintner, 112 N.E. 3d 716 (Ind. Ct. App. 2018), the Indiana Court of Appeals recently held that an agreement classified as a “rent-to-buy” contract was not technically a lease and thus the buyers were not afforded the protections of the Indiana residential Landlord-Tenant statutes. In Rainbow, the buyers, Carter and Lintner, entered into a rent-to-buy contract with the seller, Rainbow Reality Group. Id. at 718. When the buyers took possession of the residence in May 2013, the home had been vacant for almost three years and was in very poor condition. See Id. Under the terms of the contract, Carter and Lintner would pay $549 per month for 30 years. Id. at 719. Also, per the contract, the first 24 payments Carter and Lintner made would be considered rent. Id. at 720. If the couple made at least 24 rental payments, the parties would then execute a separate “conditional (land) sales contract” for the remaining 28 years. Id. Carter and Lintner later argued that this agreement was void as Rainbow was seeking to have it “both ways,” in that Rainbow treated Carter and Lintner not only like owners in holding them responsible for the upkeep of the property, but also like renters in that if they failed to make any payments during the first two years, they would be evicted. Id. at 721.
Carter and Lintner also claimed that Rainbow’s rent-to-buy agreement was goverened by Indiana’s Landlord – Tenant laws and by the Marion County Health and Housing code. Id. As a result, it was their position that this contract was invalid as a lease because Rainbow did not provide Carter and Lintner with a safe, clean and habitable home. See Id. It was also their position that this contract was invalid as a purchase agreement because it allowed for forfeiture during the first two years regardless of the investments the couple made to the property. See Id. Rainbow fought back, arguing that the Landlord – Tenant laws did not apply because Carter and Lintner were purchasing the property. See Id. The initial two years of payments were not lease payments. See Id. Rather, the first 24 monthly payments were in lieu of a down payment and were credited against the purchase price. See Id.
In conclusion, the Court held that while the agreement admittedly had some characteristics that were commonly associated with sales contracts and some commonly associated with leases, it was a hybrid device that neither the current law pertaining to sales contracts nor the current law pertaining to leases were designed to address. Id. at 726. As a result, the Court provided that the agreement was not a lease and thus determined that Rainbow was not in violation of the Landlord-Tenant Act’s Warranty of Habitability. Id. Based on said holding buyers entering into such agreements may face the possibility of eviction if payments are not made within the specified time frame even though the agreement on its face may appear to look like a mortgage. However, the Opinion in Rainbow was granted transfer to the Indiana Supreme Court on January 17, 2019. Therefore, there appears to be more still to come.
Indiana General Assembly Addresses
Given the outcome of the above, the Indiana House of Representatives also recently took up the issue in House Bill 1495. House Bill 1495 was a bill passed through the Indiana House, 82-14, designed to protect families from predatory “principle dwelling land contracts.” House Bill 1495 contained provisions that required sellers to notify the buyers at the outset of the contract the value of the property, they were purchasing, and how much they would ultimately pay for it if they completed the terms of the agreement. The Bill also mandated that, regardless of the name of the contract, after the buyers paid 5 percent or more of the purchase price, they would be subject to foreclosure if they fell behind on payments, rather than being evicted.
Despite its support in the House, the Bill was rejected in the Senate on April 24, 2019. However, moving forward, based on the on-going debate surrounding land contracts in Indiana, it is clear they are being monitored by the Legislature and the Courts and will continue to be an issue to closely watch.
If you have any questions about Land Contracts or similar arrangements in Indiana, our experienced attorneys are ready to answer your questions.