Caution Urged For Novice Homebuyers, Rookie Sellers When Considering 'Rent To Own' & Lease-Option Deals

Ontario, Canada real estate lawyer and consumer advocate Bob Aaron writes in the Toronto Star:

• The rent-to-own concept presents significant risk both to sellers/landlords and buyers/tenants. Perhaps the most significant challenge is that there are no standard lease purchase agreement forms accepted by the real estate industry, and the commonly-used templates that I have seen in my practice leave a great deal to be desired.



• Trying to determine an option price for a transaction taking place in three to five years in the future is largely guesswork. If the price is too high on the option date, the buyer will back out, and if it’s too low, the seller will walk away for potential additional profit.



• As well, tenant buyers may be paying more than market rent so that each month some money will be credited against the eventual purchase price. If the buyer backs out at the expiry of the lease option, he or she will lose the option fee and any monies paid along the way as a credit against the purchase price.



• Buyers may also be exposed to unlicensed real estate agents like the ones who sent me the marketing email last month, or to unscrupulous sellers.(1) Back in September, 2008, the Toronto Star reported on Solution Homes, the operators of a rent-to-own scheme who leased houses from desperate sellers, subleased them to tenants, pocketed the rents without making mortgage payments, and left the tenant buyers to be evicted by the mortgage lenders.



• For investor sellers, the worst case scenario is when the tenant buyer goes into default. The [Ontario] Landlord and Tenant Board has ruled that it does not have jurisdiction to evict a defaulting tenant who has an option to purchase. Power of sale and foreclosure proceedings cannot be used, and landlord sellers are forced to take defaulting buyers to Superior Court to evict them and terminate the option agreement.



• This is what happened in the case of Novotny v. Fowler in 2009 [affirmed Novotny v. Fowler, 2010 ONCA 120 (2010)] where the parties retained lawyers and experienced significant delay and expense to unwind their rent-to-own deal when the buyer defaulted.(2)

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• Rent-to-own is not for everyone. For both sellers and buyers it involves a significant amount of risk. Participants in the program should only deal with licensed real estate agents and with real estate lawyers who are familiar with the concept.

For the column, see Rent-to-own deals can be risky business.

(1) Unscrupulous sellers could use these types of 'deferred title transfers' to unload, onto unwitting buyers, homes having significant defects (could be structural/construction defects, undisclosed surprises (ie. mold or meth contamination, etc.), or defects relating to the title to the home (ie. encroachments, code violations, improvements made without the proper permits, crappy title resulting from a defective foreclosure, etc.)). The point here is that a would-be buyer in these types of 'deferred title transfer' deals may not think to conduct the same types of inspections and title searches that a buyer would consider in a conventional, standard buy-sell real estate transaction. Consequently, the enumerated problems could go undetected/undiscovered.

(2) Rent-to-own, lease-option, and land contract (a/k/a agreement for deed, contract for deed, etc.) sellers in the U.S. face the risk that a tenant could claim that the arrangement constitutes an equitable mortgage, which, should a court agree, would make a standard tenant eviction proceeding unavailable to the landlord/seller. Regaining possession of the premises would require a full-fledged foreclosure action. See, for example:

• Breaking a lease-option contract:
  
  Some lease-option tenants will fight eviction and claim in court they have an "equitable interest" in the property. The more "equity" the tenant has amassed, the more likely it is a judge will rule the arrangement an equitable mortgage, forcing you to go the foreclosure route. In some cases, the IRS has identified lease-option payments as installment-sale payments and made the original owner pay tax and penalties on them.



• Equitable Mortgage Defense Invoked In Lease-Purchase Agreement; Judge Denies Tenant Eviction, Says Foreclosure Is Required To Boot Renter.