When seeking to monetize a real estate property, real estate owners often attempt to draft a “lease with option to purchase” contract, which provides the occupant with an option, but not an obligation, to purchase the real estate at the end of a defined term. Alternatively, real estate owners may desire to enter into a “land sale contract,” sometimes referred to as a “rent-to-own” or “rent-to-buy” contract, which requires the occupant to purchase the real estate at the end of a defined term. If either agreement is not clearly drafted to achieve its intended purpose, the owner may encounter significant unforeseen obligations and liabilities.
These unforeseen obligations and liabilities were evident in the Rainbow Realty Group Empire Holding Corp. and/or Cress Trust v. Katrina Carter, et al. case, which was recently granted transfer to the Indiana Supreme Court for review. In this case, the owner attempted to draft a “rent-to-own” contract but used many terms that were more common to lease agreements, such as using the term “rent payments” and allowing the owner to evict the occupants instead of being required to foreclose the property. As such, the occupant alleged that the owner owed certain obligations (e.g. a warranty of habitability and compliance with the Indiana Landlord-Tenant Act), which were violated. Although the trial court found that the disputed contract was a lease agreement and the owner therefore breached certain statutory requirements applicable to landlords, the Indiana Court of Appeals reversed that decision by holding that the contract was actually a contract for sale, and thus the occupant was liable to the owner for breach of contract. The Court of Appeals based its decision on the lengthy definitional history of the term “lease” and cited several prior Indiana Supreme Court decisions.
The forthcoming Indiana Supreme Court decision may have a major impact on how real estate owners draft their contracts, and we will provide an update once the Indiana Supreme Court issues its opinion. As reflected in the Rainbow case, properly drafting a “lease with option to purchase” or “land sale contact” can be difficult to achieve without legal guidance. For assistance in drafting or enforcing residential or commercial real estate agreements, please contact KDDK attorney Matthew D. Malcolm at mmalcolm@KDDK.com or (812) 423-3183, or contact any member of the KDDK Real Estate Law Practice Team.
About the Author
Matthew D. Malcolm, an attorney at Kahn, Dees, Donovan & Kahn, LLP, in Evansville, Indiana, practices business law, tax law, real estate law, economic development law, creditors’ rights law, bankruptcy law, and debt collection law in the State of Indiana. Focusing on results, he is interested in meeting each client’s needs and providing quality counsel. Matt blends his business background with his legal knowledge. In doing so, he provides legal analysis and counsels his clients on the business and financial implications of a client’s legal options.