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Rent-to-Buy Real Estate: Can a Seller File Unlawful Detainer After a Default?


Ashlee Adkins

by Ashlee Adkins on August 17, 2016

in Eviction, Lending/Lender Issues, Real Estate Law

The recent case of Taylor v. Nu Digital Marketing, Inc. discusses the issue of when it is appropriate for a seller to regain possession of a property from a buyer by filing an unlawful detainer action.

In Taylor, the Plaintiffs (sellers) and Defendant (buyer) entered into an agreement entitled “Contract of Sale Residential Property” in August of 2012. The agreement provided that the buyer will maintain possession of the property and make probationary installment payments for 60 months. These probationary installment payments did not go towards the purchase price. The buyer was also required to contribute to the purchase price during the 60 months by grants of equity in their corporation, property taxes, homeowner association fees, and payments in excess of the probationary installment amount.  At the conclusion of the 60 months, the remaining balance on the $1.25 million purchase price was to be paid in full in order for the buyer to own the property.

In June of 2013, the buyer defaulted on the probationary installment payments, and sellers filed an unlawful detainer action to regain possession of the property. Sellers claimed that their agreement with the buyer created a tenancy in which they could regain possession by unlawful detainer. Defendant argued that sellers’ complaint failed to state a cause of action because they were a purchaser, not a tenant. The trial court sided with the sellers.

The trial court held that despite the agreement being entitled ‘contract of sale’, the contract between the plaintiffs and defendant was primarily a lease agreement, with the contract for sale being secondary and taking effect at the conclusion of the 60-month term. Additionally, the court reasoned that both the ‘probationary installment’ payments and the sellers’ ability to use a Five-Day Notice to Quit as a remedy upon buyer’s default were characteristics of a landlord-tenant relationship.  (CCP§ 1161).

The Court of Appeal affirmed the lower court’s decision. The appellate court emphasized that the relationship created by the agreement must be characterized by reference to the rights and obligations of the parties and not by labels (Green v. Municipal Court (1975) 51 Cal.App.3d 450). The Defendant in Taylor only had a right of possession of the property for the first 60 months, and did not have the opportunity to own the property until the 60-month term elapsed and the purchase price was paid in full. Additionally, the agreement between the parties conspicuously stated that the Plaintiffs may use a 5-day notice. The appellate court went on to reason that when possession is achieved through a landlord-tenant relationship, unlawful detainer may be utilized to regain possession.  As mentioned by the lower court, the terms of the agreement were those readily found in tenancy agreements.

Buyer’s possession of the property was conditioned upon the satisfaction of the probationary installment payments. The court noted that the probationary installment payment provision set forth a 60-month lease, with the payments therefore being rent. To support that contention, the trial court reviewed email correspondence between the parties evidencing that both sides understood the payments to be considered “rent”. Through both the means in which the buyer in this case obtained possession, and the landlord-tenant characteristics of their agreement, an unlawful detainer action was an appropriate remedy.

This case is particularly relevant today with the prices of homes as high as they are. These contract for sale/lease hybrid contracts can be an affordable alternative to prospective purchasers.  With the benefit of affordability, also comes the risk. Prior to entering into a real estate purchase agreement similar to the one in Taylor, a prospective purchaser should consult with a real estate attorney to better understand the potential benefits and pitfalls.

 

Taylor v. Nu Digital Marketing, Inc., (2016) 245 Cal. App. 4th 283, Court of Appeals of California, Third District

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