Rent-to-Own Agreements

A popular contract between Landlord/Sellers and Tenant/Buyers comes under increasing government scrutiny.

Like its close relative, the “contract-for-deed,” the so-called “rent-to-own” agreement sounds like a “win-win” situation: Tenant likes the house in which she is living and would rather be investing her money into a mortgage than a lease but cannot qualify for a conventional loan. Landlord likes the idea of a long-term tenant, the “bump” of a possible “option fee” at the outset of the relationship and maybe even retaining the house if the tenant defaults on the lease and is evicted.

   However, the potential pitfalls of rent-to-own agreements in North Carolina may be inferred by the fact that in 2010 the State of North Carolina enacted an entire statutory subchapter to regulate such transactions. Confusingly known as the “Homeowner and Homebuyer Protections Act,” N.C. Gen Stat. § 47G-1 et seq. (“Act”) ‒ confusing because the contract-for-deed subchapter carries the same name ‒ the law imposes stricter requirements for rent-to-own agreements with the result that such agreements are more subject to attack as being invalid.

Coverage

   The Act applies to the situation where a landlord and tenant enter into a lease agreement for a “single-family residential real property” coupled with an option on the part of the tenant to purchase the leased premises during some specified period of the lease term. Frequently, the option contract provides for a lump-sum option fee to the landlord and/or partial credits of rental payments to the tenant if the tenant exercises the option within the time allowed.

Minimum Contract Requirements

   As of October 1, 2010, a rent-to-own agreement or “option contract” must be stated in a signed and notarized contract and the contract itself must include all the terms of the agreement as well as some statutorily-imposed disclosures.
    The terms must include, among other things, the names of the parties; the legal description of the property to which the contract pertains; the actual sales price of the property; the price the tenant is paying for the option; and the time period in which the option remains open. Importantly, all of the obligations the tenant is undertaking, the breach of which might lead to forfeiting the option, must also be set forth in the agreement.
    Once signed by all the parties, the seller is responsible for recording either a copy or memorandum of the agreement with the register of deeds within five days of the making of the agreement.

Forfeiture

   If the tenant defaults on an obligation imposed by the option contract, the law requires the Landlord first to notify the tenant of his intention to forfeit the option contract, and then to give the tenant a chance to cure the default within, at a minimum, 30 days. The “notice of default” must be hand-delivered or served in the same manner as other legal process.

Landlord-Tenant Law

   The existence of the option contract notwithstanding, the Act provides that the tenant is still subject to Summary Ejectment proceedings in small claims court under N.C. Gen. Stat. § 42-26 et seq. If any substantial amount of money is in dispute, one would have to take care not to preclude a full monetary recovery on account of the jurisdictional cap imposed on actions in small claims court.
    The enactment of chapter 47G should plainly help the parties to a rent-to-own agreement “get it right” and, notably, there is only one appellate case applying the chapter to a dispute. But as the case itself, Lee v. Cooper, 801 S.E.2d 371 (Ct. App. 2017), demonstrates, there is still plenty of room for parties to “get it wrong.”
    You may also want to read the earlier A Legal Moment article on another common arrangement between private buyers and sellers: Contracts for Deeds.