Do the Terms of Your “Rent-To-Buy” Agreement Subject You to Landlord-Tenant Laws?

Rent-to-buy agreements can be an attractive option for property sellers and purchasers alike when the right conditions are present. They create options for potential home purchasers who may be having trouble qualifying for mortgages and for property sellers holding onto below-market property. However, before entering into a rent-to-buy agreement, property sellers and purchasers in Indiana should think about whether the Indiana landlord-tenant laws apply to their agreement.

In Rainbow Realty Group, Inc. v. Carter, a recent Indiana Supreme Court decision on the subject, the Court held that the “rent-to-buy” agreement between the parties was not a land-sale contract but a rental agreement, making it subject to Indiana’s landlord-tenant statutes. While landlords and tenants are free to contract on many things that may come up in a typical residential lease such as pets, guests, and utility responsibilities, not all rights and duties determined by the landlord-tenant statutes can be contracted away. In particular, a landlord must always deliver its tenant the rental unit in a habitable condition. If the unit fails to meet this condition due to unsealed doorways, insufficient plumbing, or lack of heating during the winter months, for example, the tenant may assert its rights against the landlord to obtain damages as well as the costs of the action if it prevails. The landlord’s warranty of habitability cannot be contracted away by an “as is” clause. Conversely, a purchaser may want to know whether the terms of its rent-to-buy agreement make it a tenant rather than a real estate purchaser, as the laws governing the eviction process create less rights for a tenant than the laws governing the foreclosure process for a mortgagor. Specifically, if the landlord has asserted its right to evict a tenant properly under the law, the tenant does not have an absolute right to catch-up on its past due rent as a mortgagor does on missed payments prior to foreclosure. This can have adverse and longstanding effects on the tenant’s credit history and ability to obtain housing in the future if the landlord is unwilling to negotiate to let the tenant stay.

The Rainbow Realty case highlights two issues that may aid parties in contracting outside the realm of landlord-tenant laws in Indiana when it comes to rent-to-buy agreements. First, the Court focused on the fact that the agreement contemplated a 24-month period of rental payments followed by a 28-year land sale contract conditioned on the purchasers’ successful payment of the rental payments. Thus, parties entering into rent-to-buy agreements may want to make clear that there is payment for an option to purchase the property at some point in time in the initial agreement. Second, the Court also recognized that the parties’ agreement restricted the use of the property to a “residential purpose.” Restrictions on use are indicative that there has not been a transfer in ownership, so sellers and purchasers may also want to avoid restricting the purchaser’s use of the property in rent-to-buy agreements if their wish is to avoid a landlord-tenant relationship.