In
theory the arrangement sounds like a “win-win” situation: Tenant
likes the house in which she lives. She would rather be investing
her money into a mortgage but cannot qualify for a conventional
loan. On the other side, Owner likes the idea of a long-term
"tenant," the “bump” of a down payment at the outset of the Owner-Buyer
relationship, and the prospect of keeping the house if the tenant
defaults on her payments.
That
is the theory but the potential pitfalls of "land contracts" in North
Carolina may be implied by the fact that in 2010 the State of North
Carolina enacted an entire statutory sub-chapter to cover them.
Known as the “Homeowner and Homebuyer Protection Act,” N.C. Gen Stat. §
47H-1
et seq. (“Act”), the law imposes stricter requirements
for land contracts with the result that such contracts are harder for
Owners to enforce in a court of law when the buyer defaults.
As one legal aid lawyer recently and gleefully told me: “courts hate these things.”
Coverage
Whether titled “land contract,” “contract for deed,” “installment
land contract,” or anything else, the Act applies to the situation
where an Owner agrees to sell an interest in property to a Buyer who is
to pay the purchase price in five or more payments, with the Owner
continuing to hold title to the property until the full purchase price
is paid. (By contrast, in a conventional mortgage, the title
passes immediately to the Buyer at the closing while the lender or
owner-financier places a lien on that title in the form of a deed of
trust.)
Minimum Contract Requirements
As of October 1, 2010, a land contract must be
in writing and contain any number of statutorily-imposed terms
including, but not limited to: the formal legal description of the
property to which the contract pertains; the number, amount, and timing
of installment payments; how much of a down payment, if any, the Buyer
has made; late fees, if any; and the Buyer’s right to cure a default
prior to forfeiting her interest in the property.
A late-payment provision in the contract must
limit the charge to no more than 4% of the installment payment, and can
only be charged where the underlying payment is more than fifteen days
past due.
If the Owner has himself mortgaged the property, he
needs to inform the Buyer of that fact prior to entering into the land
contract.
Once signed by all the parties, the Owner is
responsible for recording a copy of the agreement itself or a memorandum
of the contract, with the register of deeds.
Ongoing Obligations
When the Agreement is in place, the Owner is
responsible for providing an annual statement of account to the Buyer
and a host of other information such as how much the Buyer has paid
under the contract, how much remains owing, the number of installment
payments yet to be made, and how much the Owner has paid tax authorities
on the property for the year.
Forfeiture
If the Buyer defaults on the contract –
presumably failing to make one of the installment payments – the law
requires the Owner first to notify the buyer of his intention to forfeit
the buyer, and then to give the buyer a chance to cure the default
within not fewer than thirty days. The notice must be
hand-delivered or served in the same manner as other legal process.
Arguably the most startling aspect of the Act
is that it deems a “violation of any provision” of the Act as an “unfair
trade practice” under N.C. Gen. Stat. § 75-1.1. Should a court
decided that the Owner has engaged in an unfair trade practice under the
land contract, it can order the Owner to pay the Buyer’s attorneys’
fees and costs and impose treble damages.
If the foregoing narrative leaves you with the
feeling that you have to draft a land contract carefully, and pay
attention to ongoing obligations, then it has accomplished its purpose.
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