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“Buyer/Tenant” Beware: Purchase Contract May Include Lease Agreement

The case of Taylor v. Nu Digital Marketing, Inc. involved an unusual purchase contract for residential property.  The contract set forth payment of the “purchase price,” and also included a provision that Buyer would pay monthly “probationary installments” for 60 months, which would not count toward the purchase price.  Only payments in excess of the monthly probationary amount went toward the purchase price.  The contract also provided that the probationary payments would increase by any increase in the mortgage payments.  Finally, the contract gave Buyer the right to possession only while making the monthly probationary payments, and gave Seller the right to evict Buyer for failure to do so if not cured.

 

The monthly mortgage increased but Buyer failed to pay the corresponding increase in the monthly probationary amount.  Seller served a five-day Notice to Quit, and Buyer failed to cure.  Seller filed an unlawful detainer action, and the court ruled in favor of Seller, finding that the “purchase contract” also included a lease agreement, with the “probationary installments” as rent.  Seller appealed, arguing that the contract was for purchase and sale, and thus Buyer could not state a claim for unlawful detainer.

 

The appellate court affirmed.  While unlawful detainer actions are typically not available to a seller to regain possession of property when the buyer defaults on an installment payment on the purchase price, they are available to a landlord when a tenant fails to pay rent or otherwise breaches a lease.  The court recognized that an agreement can be for both a purchase/sale and lease, where possession is achieved through a landlord-tenant relationship.   In determining whether the contract at issue is for purchase and sale, a lease, or a combination thereof, the court looked to the rights and obligations of the parties.

 

In this case, the contract did not require a down payment and subsequent installment payments to pay off the purchase price.  Rather, it required a down payment plus monthly probationary installment payments for 60 months.  Possession was conditioned on the continued payment of the probationary amounts.  Importantly, only payments in excess of the probationary payments went toward the purchase price.  The court therefore concluded that the probationary installment payment provisions created a 60-month lease, with the monthly payments constituting rent.  This was bolstered by the fact that both parties routinely referred to such payments as “rent.”  As such, an unlawful detainer action for non-payment of rent was appropriate.

 

Buyers, sellers and brokers should pay careful attention to purchase contract language that may raise lease issues.

Taylor v. Nu Marketing, Inc. (2016) 16 C.D.O.S. 2284

(03/16)