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Indiana Supreme Court Decision Highlights Importance of Rent-to-Own Real Estate Contract Language

Contract ImageBy Matt Rust

Landlords using rent-to-own contracts should take a second look at the terms of their agreements following the recent Indiana Supreme Court decision in Rainbow Realty Grp. Empire Holding Corp. v. Carter, 121 N.E.3d 120. In Rainbow, a landlord’s attempt at enforcing an agreement as a land sale contract (sometimes known as a rent-to-own contract) against a tenant was denied and instead found to be a lease contract—a mistake that resulted in a litany of other regulations and laws to apply to the property owner such as the Indiana Landlord-Tenant Statutes.

The residential landlord-tenant statutes greatly increase the obligations of a landlord in terms of a rental unit’s condition and maintenance, and opens the possibility for a court to find a breach of the warranty of habitability. Unfortunately for the landlord in Rainbow, these heightened responsibilities were found to apply after the Court held both that the agreement between the parties was subject to landlord-tenant laws and that the contract was a rental agreement instead of a land sale contract.

Despite the landlord’s inclusion of a variety of purchase-specific language within the contract – such as a declaration detailing the difference between renting and buying, adding an “as-is” clause, and having the tenant explicitly agree with terms stating they were a purchaser – the Court found that the contract’s “purported form and assigned label” did not prevent it from being considered a rental agreement due to key problematic language within the agreement and specific mechanics of the contract.

After finding the agreement was indeed a rental agreement, the Court explored the various definitions of a “dwelling unit,” “tenant,” “rental unit,” and “rental agreement,” ultimately holding that Rainbow Realty Group had an obligation to deliver the premises in a “safe, clean, and habitable condition,” an obligation they had not expected and not fulfilled under Indiana Code § 32-31-8-5(1). In addition to affirming the Trial Court’s judgment in favor of the tenant, Rainbow may face more costs, as the Court remanded the calculation of reasonable attorney’s fees that have accrued throughout litigation.

This decision demonstrates how important a properly-drafted real estate contract can be for your business. Keeping the balance between tenant and landlord rights under Indiana law while drafting real estate agreements is critical in preventing disputes from arising down the road.

For assistance in drafting or enforcing residential or commercial real estate agreements, please contact any member of the KDDK Real Estate Law Practice Team.

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