Rent to Own Contracts in Pennsylvania
In Pennsylvania, a question that comes across my desk quite often involves rent-to-own scenarios. This comes to me from either direction, either you are a Pennsylvania homeowner, and you have a tenant that wants to purchase your property, but doesn’t have the funds or the credit to do it outright, or I also get tenants that come to my office asking to help them make that offer to their landlord.
In a residential scenario, this is a very confusing type of contract, and one that I would typically advise avoiding, if at all possible. However, if you are in a scenario where it is the best option, you can make this work, but like all things knowledge is power. A typical scenario would be a buyer and seller who want to move a property between them without the use of a realtor and the intervention of banks and secured mortgages.
First and foremost: whether you are the homeowner or the potential homebuyer, do not just simply sign whatever you are given. That is solid legal advice across the board. In Pennsylvania, a rent-to-own agreement is treated much differently than a lease. A lease is a rental agreement which gives you the use and possession of a house or apartment for a set amount of time, and creates a landlord-tenant relationship between the parties. Disagreements are handled in landlord-tenant court and removal of a tenant is called an “eviction.”
However, once you step into a rent-to-own agreement, you step out of that world. A rent-to-own agreement in Pennsylvania is officially known as an installment land contract and is governed by the Installment Land Contract Law. The down payment on an installment contract gets the buyer the right to purchase the property for the amount negotiated, and during the time frame negotiated. These are payments that go right to the seller, do not lower the price of the property and are not refundable. I said these agreements were tricky.
The buyer does not obtain the property completely until the (oftentimes long) contract has run out. Instead, the buyer obtains equity in the property as he makes payments. The buyer, having equitable title, enjoys certain benefits of ownership such as being able to possess and improve the property. Equitable title is not the same as legal title. Legal title, during the duration of the agreement, stays with the seller and therefore the buyer cannot borrow against the property in a home-equity loan scenario. The seller can, however since he is silently losing equity in the home as the contract matures, he has a duty to inform his lender of this contract.
In the event that the buyer stops making payments and the seller wants to cancel the contract and get the buyer out of the property, the seller has to take the buyer through a hybrid foreclosure/ejectment court process. This involves providing the buyer with a pre-foreclosure notice and giving the residential buyer a chance to redeem (catch up on payments). In Philadelphia there is a strong preference towards keeping a buyer in there home, and so as the seller you have to jump through a lot of hoops to try and get a defaulted buyer out. It is only after jumping through these hoops that the seller can seek to have the court determine ownership rights and can the seller seek an ejectment. Unlike in a landlord-tenant scenario, you cannot simply evict tenants in municipal court, you have to go through a potentially arduous ejectment trial process in the Court of Common Pleas and prove who has the right to the title of the property.