Rent-to-own ruling helps consumers

Marilyn Odendahl • modendahl@ibj.com

The Indiana Supreme Court reviewed a dispute over a rent-to-own contract and determined the family who had been living in the home were renters, not buyers.

The unanimous 19-page decision was somewhat a victory in a protracted battle that began in 2013 with Indianapolis residents Katrina Carter and Quentin Lintner signing a rent-to-own contract for a house that was missing toilets, plumbing, electrical wiring and door locks in addition to being infested with animals. Rainbow Realty Group and Cress Trust, the housing provider, had contended it was selling the home to the couple and, therefore, was under no obligation to refurbish or maintain the property.

The five Indiana justices found the contract Carter and Lintner signed was a rental agreement and not a purchase agreement, as they had been led to believe. Consequently, Rainbow and Cress had to deliver the house in a safe, clean and habitable condition, which, the court said, they did not.

With the ruling in Rainbow Realty Group, Inc., et al. v. Katrina Carter and Quentin Lintner, 19S-CC-38, there is now a court precedent. Families who enter rent-to-buy contracts might have some remedy to prevent their dreams of homeownership from becoming a nightmare.

“I can’t imagine a decision in this case that would have removed all doubt for all possible scenarios that will come up,” Jon Laramore, executive director of Indiana Legal Services, said, explaining rent-to-buy agreements vary widely. “But the Supreme Court provided the framework the courts can use when they analyze similar but not identical agreements.”

Rainbow had told the court its rent-to-buy program consisted of purchasers entering into a two-year lease. If payments and obligations were met, then the lease would be converted to a land-sale contract. The buyers did not accrue equity during the initial 24 months, and if they did not meet their financial requirements, they faced eviction.

Many who enter a rent-to-own agreement are not successful at getting to the land contract, according to legal aid attorneys.

Chase Haller, attorney at Neighborhood Christian Legal Clinic, said the business model for the rent-to-buy industry depends on churning people through the properties. The companies offering these kinds of agreements do not have to invest much in the homes, but when they evict, they reap the benefits of any improvements the previous tenants made. Meanwhile, the individuals who had lived there do not get any equity for the repairs they made and are forced to leave under the stain of eviction.

Haller sees the Supreme Court’s decision as having far-reaching implications for any contract that includes a rental period. During the rental portion of the agreement, the company will have to abide by the Indiana landlord tenant statute, providing a home that is livable and making the repairs and improvements.

“I think this case itself is a welcome decision for consumers who find themselves in a situation where they can’t understand if they’re a tenant or buyer,” Haller said.

For Carter and Lintner, the ruling came after they had vacated the house. The couple did not have the financial resources to make the monthly payments and do the repairs needed on their home. The small claims court issued an order allowing Rainbow to retake possession, but on appeal, the Marion Superior Court found the agreement was unlawful and unenforceable.

At the Indiana Court of Appeals, the trial court was reversed. The panel ruled the agreement was not a residential lease. The Supreme Court remanded the case with instructions for the trial court to recalculate the award of attorney fees.

Indiana Legal Services represented Carter and Lintner. Laramore, along with attorneys Cheryl Koch-Martinez, Adam Mueller and John Brengle worked on the case. Bingham Greenebaum Doll LLP represented Rainbow Realty. Karl Mulvaney, partner at Bingham, declined to comment.

The ILS team said the broader impact of the Supreme Court decision is that sellers offering the rent-to-buy contracts cannot play both sides. They cannot claim the agreement is for purchase, so they have no obligation to make sure the property is habitable, while also claiming the agreement is a lease that allows them to evict the tenants rather than go through the lengthy foreclosure process.

“It is the operation of the agreement, not language (in the contract), that dictates whether it is a rental transaction or a land contract,” Laramore said.

While pleased with the ruling, Haller fears the rent-to-buy companies will switch to offering land contracts. Since Indiana does not have many laws governing the latter agreements, consumers have little protections and could be subjected to harm.

“I do think the market is full of pitfalls to the purchaser because of sellers and investors who aren’t doing (the transaction) in a way that ensures they’re meeting their obligations to the purchaser,” Haller said.

Originally published in Indiana Lawyer.