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
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
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.
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.
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