“Economics Of The Transaction” Establish Land Contract Rather Than Lease

Lesson. When determining whether a real estate agreement is a lease or a land sale contract, follow the money.

Case cite. Vic’s Antiques v. J. Elra Holdingz, 143 N.E.3d 300 (Ind. Ct. 2020)

Legal issue. Whether an agreement was a lease (subject to an eviction remedy) or a land sale contract.

Vital facts. Elra, as the owner, and Vic’s, as either the purchaser or the tenant, executed a “Lease Agreement” for a building and 3+ acres of real estate. Vic’s agreed to pay $1,265.30/month for twenty years with an option to purchase the property for $1.00 at the end. The opinion details the terms and conditions of the agreement. The language of the contract controlled the outcome – not testimony or any other documents. Of paramount importance were “the economics of the transaction.”

Procedural history. About a year after the signing of the agreement, Elra filed an eviction action against Vic’s based, not on a payment default, but on other breaches related to the maintenance and condition of the property. The trial court ruled in Elra’s favor and ordered Vic’s to vacate the property. Vic’s appealed.

Key rules. In Indiana, “the transaction's purported form and assigned label do not control its legal status.” Therefore, “to determine whether the agreement is a lease or a land sale contract, [Indiana courts] look beneath the surface of the agreement and … consider the substance of the agreement to determine the intent of the parties.”

“'In effect,' a land sale contract is 'a sale with a security interest in the form of legal title reserved by the vendor' and that the 'retention of the title by the vendor [owner] is the same as reserving a lien or mortgage.' In other words, in a land sale contract, the vendor retains legal title to the real estate until the vendee pays the total contract price. And … a land sale contract is ‘in the nature of a secured transaction.’”

The Court also looked to the UCC for help in making its decision as “essentially the same rules which distinguish a lease from a sale under the UCC apply….”

Holding. The Indiana Court of Appeals reversed the trial court and concluded that the agreement was a land contract, which could not give rise to an eviction.

Policy/rationale. The Vic’s opinion is excellent in terms of how the Court relies upon and analyzes the financial aspects of the deal. Vic’s is a valuable resource for parties or counsel on the origination side of such deals and on the back-end enforcement of them. Although the facts are dense, there is a road map within the case about how to create a land contract or how to create a lease with an option to buy so as to avoid land contract status—depending upon your objectives. This case, together with the Indiana Supreme Court’s decision in Rainbow Realty (link to my 8/22/20 post here), have really helped define this area of Indiana law over the last couple years.

The Court’s comments below capture the essence of its overall rationale, which zeroed in on the “economics” of the deal:

In addition, in order to exercise its $1.00 “option to purchase,” Vic's must first have paid a sum equal to 240 monthly payments of $1,265.30, or a total of $303,671.63, which is $103,671.63 more than the purchase price. Elra has failed to account for this additional payment. A simple calculation confirms that this amount represents interest on the $200,000 purchase price.

Amortization is the payment of a debt with interest over time. The agreement provides for the amortization of $200,000 in principal payable in 240 monthly payments of exactly $1,265.30. Solving for the interest rate yields a rate of 4.5%. This amortization is the Rosetta Stone that unpacks and reveals the nature of the agreement. All four of these factors—the principal amount, the number of monthly payments, the amount of each monthly payment, and the interest rate—are integral to the amortization schedule, and each factor depends upon the others.

Interest represents the time value of money. While contract purchasers pay interest on the unpaid principal balance of a land sale contract, lessees do not pay interest on future rent payments. Here, the four factors comprising the amortization show that the monthly payments were not “rent payments” but contract payments of principal and interest on a fully amortized land sale contract.

The Court concluded that, although the contract “contains terms that are consistent with a lease, it is clear from the economics of the transaction that from the outset the parties intended for Vic's to acquire the option property. Accordingly, we can say with confidence that the agreement … is a land sale contract.”

Note: I regret that the opinion in Vic’s did not address the remedy available to Vic’s: foreclosure vs. forfeiture. The Court was on a roll, and the remedy aspect of land contract cases can be just as complicated as determining whether the agreement is or is not a land contract to begin with. Alas, that issue was not ripe for a ruling, and the early termination of the contract weighed heavily in favor of forfeiture anyway.  

Related posts.

Part of my practice involves handling real estate and loan-related disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

REAL ESTATE FINANCING TIDBITS: Consistency In Both the Form and Substance Of An Indiana Land Contract Is Essential To Post-Breach Enforcement

Standard Operating Procedure.  Traditional real estate financing involves a purchase evidenced by a deed, coupled with a promissory note secured by a mortgage.  The seller typically (but not always) is out of the picture because title transfers at closing.  The seller receives the full purchase price in exchange for delivering a deed to the buyer.  (The exception is when the seller takes back a note and mortgage and thus become the lender/mortgagee, but most transactions are financed by a third party.)  In a conventional sale, what remains post-closing is a lien on the real estate that serves as collateral for the loan.  If the new owner (borrower/mortgagor) defaults under the loan, the lender/mortgagee has the right to sue for the debt and foreclose its mortgage. 

Purchase Without A LoanA land contract is another, albeit less conventional, form of real estate financing.  The deal normally requires the buyer to make payments over time to the seller (the owner).  In many instances, the contract will require a down payment and/or a large balloon payment.  Only after the buyer fully pays the contract price does the buyer get a deed and become the owner.  In the interim, although the buyer gets to possess and occupy the real estate, legal title remains with the seller, although something called equitable title vests with the buyer.  See Skendzel v. Marshall, 261 Ind. 226, 234, 301 N.E.2d 641, 646 (1973) (“Legal title does not vest in the vendee [buyer] until the contract terms are satisfied, but equitable title vests in the vendee [buyer] at the time the contract is consummated.”)  One might say that the seller is a hybrid between a landlord and a bank.  Usually, but not always, these transactions apply to situations where the buyer is unable or unwilling to get a traditional loan, or to informal deals between family and friends.

Rights Upon Breach?  Indiana substantive law and the procedural rules related to mortgage foreclosures are fairly settled, which is to say that the parties’ rights and remedies are well established.  This is not the case with land contracts, which may seem simple to close yet can be complicated to enforce.  When there is a breach of the agreement, the dispute may look and feel like an eviction proceeding, a mortgage foreclosure action, or both.  Frankly, lawyers and judges struggle with how best to handle land contract disputes, and the parties themselves rarely understand what can or should happen if the deal goes bad.    

I attribute this potential complexity to the overlapping ownership and possessory rights of the parties.  Should the contract be treated like a lease (possession only) or like a mortgage (lien/ownership)?  Upon a default, should the seller/owner be permitted to simply evict the buyer, or should the seller be forced to obtain a foreclosure decree and have a sheriff’s sale?

Sale Or Lease?  When faced with a purported land contract enforcement action, one should examine whether the contract fits the mold of a sale versus a lease.  The answer to this question will control the remedies upon the default.  (By the way, these issues are not unique to real estate law.)  In a standard land contract dispute, the owner/seller will want the buyer out of the property asap with as little legal and practical hassle as possible.  In other words, the owner will want to evict the buyer, a remedy known as forfeiture in this context.  On the other hand, the buyer may want to protect its alleged equity in the real estate or, in other words, will want credit toward ownership for the payments made.  This is to say that the buyer may want the rights attendant to mortgage foreclosure actions (time, right of redemption, sheriff’s sale process, etc.).  

The Rainbow Realty Case

    The Issue.  This brings me to today’s topic, last year’s Indiana Supreme Court opinion in Rainbow Realty Group v. Carter, 131 N.E.3d 168 (Ind. 2019).  The decision is interesting and impactful on many levels for non-traditional lenders, real estate developers, and landlords.  For purposes of my blog and particularly today’s post, however, I’ll zero in on the Court’s discussion of whether the written agreement was a land contact or a lease.  Were the parties to the dispute sellers/buyers or landlords/tenants?  Unlike most land contract disputes, the buyers in Rainbow wanted the agreement to be a lease so they could countersue for damages.

    The Facts.  The contract in Rainbow was labeled a “Purchase Agreement (Rent to Buy Agreement).”  The language in the agreement clearly expressed an intent to be a thirty-year land contract as opposed to a lease, although the first two years of payments were in fact for “rent.”  If the buyer performed for the first two years, the parties would execute a separate “Conditional Sales Contract (Land Sale)” for the remaining 28 years.  The seller contended the agreement was a land contract, and the buyer asserted the agreement was a lease.  The heart of the dispute was whether the seller could be liable to the buyer for damages for failing to comply with Indiana’s residential landlord-tenant statutes, Ind. Code 32-31.  The seller contended it was exempt from those laws.

    The Holding.  The Court concluded that the agreement was not a land contract, even though wording in the document said things like “My intent is to purchase … [and] I am not renting the property….”  Indeed the Court conceded “that most of the transaction’s terms and formal structure suggest this was a sale … necessitated by the Couple’s inability to afford a down payment for the House.”  Sometimes, the label or title to a contract, or written stipulations in the contract, are immaterial.  Rarely does form prevail over substance.  The Court in Rainbow said:  “the transaction’s purported form and assigned label do not control its legal status.” 

    The Rationale.  The key appeared to be that the agreement operated as a lease for two years with a contingent commitment to sell, which sale would require a separate contract.  Importantly, “if the Couple defaulted before executing the subsequent ‘Land Contract’, or they failed to make payments or to close this latter transaction, they were subject to eviction and forfeiture of all payments made.”   The opinion reads:

During the Agreement's twenty-four-month term, [the seller] reserved for themselves a landlord's prerogative to enter the premises, restricted the Couple's use of the land, and, upon the Couple's default, evicted them as if they were tenants and kept their “rental payments”.  These features, taken together, are particular to a residential lease. Thus, the parties' Agreement—a purported rent-to-buy contract—is not a “contract of sale of a rental unit” and thus is not exempt from the Statutes' coverage under Section 32-31-2.9-4(2).

The Policy.  The seller’s structure in Rainbow backfired.  There is a lot more to story, so please read the opinion if you are interested in more detail.  There are consumer rights themes built into the Court’s findings.  In a nutshell, following a payment default by the buyer, the seller sued for damages and repossession, not unlike a land contract dispute.  To the chagrin of the seller, which appeared to be offering financing and housing to low income individuals, the seller ended up facing a judgment for money damages and attorney fees as a de facto landlord.  The Court held that the structure of the deal in Rainbow, namely an initial two-year rental term followed by a subsequent sale term, was not a land contract, at least for the first two years, making the seller a landlord.  Here is the Court’s policy statement:

If this case were simply about the parties' freedom of contract, the [buyers] would have no legal recourse. Plaintiffs disclaimed the warranty of habitability, informed the [buyers] that the House required significant renovation, and forbade them from taking up residence there before it was habitable. The [buyers] agreed to these terms but soon thereafter violated them. Were it not for the governing Statutes, Plaintiffs would be entitled to relief against the Couple for having breached their Agreement. But the Statutes are not about vindicating parties' freely bargained agreements. They are, rather, about protecting people from their own choices when the subject is residential property and their contract bears enough markers of a residential lease. Unless a statute is unconstitutional, the legislature is entitled to enact its policy choices. The disputed statutes at issue here reflect those choices.

Some Takeaways

    Can’t have it both ways.  The format of a “rent-to-buy” aka a land contract is often ambiguous and places the owner in a hybrid role as both a landlord and seller.  Seemingly, in Rainbow the development company drafted an agreement that was a combination of a lease and a land contract.  It wanted the document classified as a land contract so it did not have the responsibilities of a landlord.  At the same time, the developer wanted the benefit of a lease for the first couple of years so it could easily evict the buyer if he or she did not pay.  Parties entering into these types of agreements should be wary of how their contract will be characterized.  Both the format and substance of the agreement should be consistent to avoid any confusion regarding the parties’ rights and obligations.  Not often will the law allow one to have its cake and to eat it, too.

    Be clear.  If as a seller you want to be able to retain ownership and simply evict an occupant after he/she fails to make payment, then you should expect the court to treat the agreement as a landlord-tenant arrangement.  If on the other hand you want to sell the property through payments over time, the form and substance of the agreement should make it clear that the deal is to convey ownership, and you should recognize that equitable title and its associated rights vest with the buyer.

    My two cents.  Finally, in case you’re wondering, I personally would never recommend entering into a land contract, as either a seller or a buyer.  There are too many risks and uncertainties.  With leases or loans, everyone – including the courts – knows where the parties stand.  If traditional financing isn’t an option, seller financing in the form of a standard note and mortgage is, in my view, better than a land contract.

(Thanks to my colleague David Patton for his help with this article.)

I represent parties in real estate and loan-related disputes. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

Lien Priority Dispute: 2005 Mortgage v. 2000 Land Contract

The Indiana Court of Appeals, in Lunsford v. Deutsche Bank, 966 N.E.2d 815 (Ind. Ct. App. 2013), begins its opinion with this legal principle:  “. . . first in time is first in right . . . .”  In Indiana property and debt collection law, this means “a prior lien gives a prior claim, which is entitled to prior satisfaction, out of the subject it binds . . . .”  This rule doomed a land contract buyer (vendee) in his priority dispute with a lender (mortgagee).

The operative dates.  In Lunsford, the owner of the real estate entered into a land contract to sell on August 28, 2000, but the buyer failed to record the land contract until March 8, 2006.  On August 25, 2005, the owner obtained a mortgage loan, and the lender recorded the mortgage approximately six months before the recordation of the land contract.  The owner subsequently defaulted on the mortgage loan, resulting in the lender’s foreclosure suit. 

Priority dispute.  The issue in Lunsford was whether the land contract should have been foreclosed as a junior and subordinate interest to the lender’s mortgage.  In other words, was the land contract buyer’s claim to the real estate subject to the lender’s mortgage, even though the land contract predated the mortgage by five years?

Mortgage superior.  The Court in Lunsford swiftly dispensed with the land contract buyer’s priority contention.  Since the lender recorded its mortgage six months before the buyer recorded its land contract, the mortgage was senior in priority.  Further, since the lender made the buyer a party to the foreclosure action, thereby giving him the opportunity to assert his junior interest in the real estate, the trial court’s foreclosure decree was conclusive as to the buyer.  The Court affirmed the trial court’s summary judgment in favor of the lender accordingly.  Moral:  Don’t Forget To Record.

Different outcome.  While Lunsford appears to be a straight forward case, the Court of Appeals actually reached the opposite result in the 2007 Pramco opinion I discussed here.  The Pramco Court leaned on principles of equity and focused on, among other things, the amount of payments that the land contract buyer had made before the lender’s foreclosure suit.  The Pramco opinion was much more factually involved, while the land contract facts in Lunsford really were not addressed.  Note that the prevailing land contract buyer in Pramco was represented by counsel, whereas the losing buyer in Lunsford was pro se


Despite Lis Pendens, Onus Generally On Plaintiffs (Mortgagees), Not Tenants, To Deal With Leasehold Interests In Mortgage Foreclosure Actions

This follows-up my June 28th post about Myers v. Leedy, “To Terminate Post-Mortgage Leases, Tenants Generally Must Be Named In Foreclosure Actions.”  What actions must the tenant take if it knows or should know about a pending foreclosure action? 

Seller’s contention.  One of the arguments of the land contract seller on appeal of the Myers case was that the tenant had both constructive and actual knowledge of the pending breach of contract action at the time the tenant entered into the lease for the 2006 crop season.  The seller claimed it should not have been forced to name the tenant as a defendant in the action; rather, the tenant should himself have intervened in that action in order to protect his interests. 

Lis pendens, generally.  The seller’s argument triggered the Court’s analysis of Indiana lis pendens law.  See, Ind. Code §§ 32-30-11-1 to 10 and Indiana T. R. 63.1.  “Lis pendens” is Latin for “pending suit.”  The Court outlined that, historically, lis pendens provided that one who acquires an interest in real estate during the pendency of a lawsuit concerning the title to that real estate takes notice of such lawsuit and has to take its interest in the real estate subject to any subsequent judgment.  Ind. Code § 32-30-11-2 modified the common law and requires that the plaintiff file a separate, written notice with the county clerk’s office to perfect the lis pendens protections.  (I also wrote about lis pendens on 12-27-07 and 9-20-07.) 

Lis pendens, exception.  Statutory written notice is not required if the suit is founded upon a written instrument executed by the party having title to the real estate (like a mortgage) as appears from the properly-filed county records.  Thus the filing of the mortgage foreclosure complaint itself will provide the requisite constructive notice to post-suit claimants.  From the Court: 

We have no quarrel with the general proposition that the commencement of a foreclosure action standing alone provides third parties with constructive notice of a pending lawsuit. 

Constructive notice, but . . ..  In Myers, the seller retained legal title to the subject real estate, which interest was reflected by the memorandum of contract recorded in the county recorder’s office.  Under Indiana lis pendens law, therefore, the tenant was deemed to have constructive notice of the suit on the land contract against the buyer commenced two years before the subject lease.  But the Court did not adopt the seller’s lis pendens-related argument, reasoning that it “makes no sense” to say that a lis pendens notice of a foreclosure proceeding should bind a tenant already in possession.  To hold otherwise, a tenant in possession “must regularly check the records of the County Recorder’s office to determine whether a foreclosure action has been filed.” 

Actual notice side-stepped.  The Court also addressed the issue of the tenant’s alleged actual notice of the underlying lawsuit.  Should the tenant have intervened in the pending litigation of which he was aware?  In the final analysis, it appears that the Court may have simply concluded that the evidence was not altogether clear on whether, or to what extent, the tenant knew of the suit as it may have related to the real estate and his rights.  The Court ultimately affirmed the trial court’s finding that, among other things, the tenant should have been allowed to finish planting and harvesting his crop in 2006.  The Court had to choose a side, and it did.

“Should have known.”  As noted in my June 28th post, one of the critical factors in the Court’s decision was that the seller had actual knowledge that the tenant was farming the property at the time seller filed suit.  Thus the Court did not expand on the “upon reasonable diligence should have known” part of the test.  The Court appears to be deliberate in its requirement of notice of a tenant’s “possession” of the property.  The Court’s charge seems to be that lenders must undertake reasonable measures to determine whether there is a tenant in possession of the property.  To me, this implies observing the real estate.  Perhaps a site visit or property inspection may need to occur.  Having said that, we must remember that Myers was not a mortgage foreclosure case and dealt with the unique situation of a single tenant (farmer) on the property.  Ultimately, a secured lender’s “reasonable diligence” will need to be evaluated on a case-by-case basis. 

Business decision.  As a practical matter, in most commercial mortgage foreclosure actions the lender/mortgagee will not want to terminate any of the existing leases.  The leases generate income and thus increase the value of the property.  There are, however, instances where one or more tenants of a subject property may be undesirable and thus the target of termination.  If a business decision is made to terminate such post-mortgage leasehold interests, I recommend that you and your counsel ensure that those tenants are named as defendants in the foreclosure action. 

To Terminate Post-Mortgage Leases, Tenants Generally Must Be Named In Foreclosure Actions

Secured lenders struggling with the question of whether tenants must be parties to Indiana commercial mortgage foreclosure suits have been given a fairly definitive answer by the Indiana Supreme Court in Myers v. Leedy, 2009 Ind. LEXIS 1370 (Ind. 2009) (.pdf).  Myers actually involved the enforcement of a land contract, not a mortgage, but to the chagrin of Chief Justice Shephard, who concurred in the result, the Myers opinion applies with equal vigor to mortgage foreclosures.  In most instances, if a business decision is made to end a post-mortgage leasing relationship, the tenant in possession should be included in the litigation.

Myers particulars.  In August of 2002, two individuals entered into a land contract for the purchase of farmland and had a memorandum of that contract recorded.  In 2004, the land contract vendee (“buyer”) entered into a written lease with a third party to rent the tillable soil.  That third party (“tenant”) farmed the land in 2004, and the owner/land contract vendor (“seller”) had actual knowledge of this.  Leases between the same parties for the same purpose were entered into in 2005 and in 2006, again with the actual knowledge of the seller.  (The leases were not recorded, however.)

Proceedings.  In December of 2004, the seller sued the buyer for breach of the land contract but did not name the tenant as a defendant.  On May 17, 2006, the trial court ruled that the buyer had defaulted under the land contract and ordered the forfeiture of the buyer’s interest in the real estate.  On May 20, 2006, pursuant to the previously-existing lease, the tenant began farming the property.  The next day, the seller ordered the tenant off the property, and the tenant never returned.  Later, the tenant sued the seller because the seller prohibited the tenant from farming the property in 2006. 

The question.  The Myers case presented a matter of first impression: 

Whether a tenant’s leasehold interest in property survives a land contract vendee’s forfeiture when the tenant was not made a party to the forfeiture action and where the vendor had actual knowledge that the tenant was in possession of the property.

To answer that question, the Court examined whether a tenancy survives a foreclosure action.  The Court explained that, for purposes of its holding, there was no reason for treating forfeiture and foreclosure cases differently. 

Test for inclusion.  The Court in Myers set out the following test for inclusion of a tenant in a foreclosure action:

Where at the time a mortgagee files suit for foreclosure it knows, or upon reasonable diligence should have known, that a tenant is in possession of the property, the tenant’s leasehold interest survives the foreclosure action unless the tenant is made a party to that action.

The Court noted that the “weight of authority” provides that “a lease is terminated by the foreclosure of a prior mortgage if, and only if, the tenants are made parties to the foreclosure proceedings.” 

An aside.  Please note that the subject lease came into existence after the subject land contract.  Thus the Myers case speaks to post-mortgage leases, not leases executed before the recordation of the mortgage.  It is my understanding that, in Indiana, a foreclosing mortgagee generally will acquire the real estate collateral subject to any preexisting, recorded leases, regardless of whether the tenants are defendants in the action.  Whether a foreclosing mortgagee would acquire the property subject to any preexisting unrecorded leases is a post topic for another day . . ..)

Read all docs.  Footnote 2 on pp. 5-6 of the Court’s opinion acknowledges that the rights of the parties may otherwise be defined or governed by contract or subordinated without the need for joinder of the tenant.

Actual knowledge.  In Myers, the evidence was not in dispute that the seller had actual knowledge that the tenant was farming the subject property at the time he filed the breach of contract action against the buyer.  Because the seller failed to join the tenant in the action, the subsequent forfeiture of the buyer’s interest in the property did not extinguish the tenant’s leasehold interest.

I’m not finished with Myers … and will be posting one or two more articles based upon this significant opinion rendered by the Indiana Supreme Court….

Indiana Land Contracts and Forfeiture

I understand that commercial lending institutions typically do not get involved in land contracts.  As such, today’s post addressing the Indiana Court of Appeals’ opinion in Hooker v. Norbu, 2008 Ind. App. LEXIS 2566 (Ind. Ct. App. 2008) (Hooker.pdf) is slightly off topic.  Nevertheless, land contracts are a form of real estate financing, and enforcing such contracts could trigger the remedy of foreclosure.  In Hooker, the default under the land contract resulted in a forfeiture.

Land contract, defined.  My trusty Black’s Law Dictionary defines “land contract” as follows:

Contract for the purchase and sale of land upon execution of which title is transferred.  Term commonly refers to an installment contract for the sale of land whereby purchaser (vendee) receives the deed from the owner (vendor) upon payment of final installment.  The vendor retains legal title to the property as security for payment of contract price, while the vendee is said to have equitable title during the term of the agreement.

Unlike the promissory note/mortgage scenario, in which a mortgage creates a lien on property but not title to it, vendors (sellers) in the land contract transaction are the property owners.  See, Indiana Follows The Lien Theory Of Mortgages.

Circumstances.  In Hooker, plaintiff (property owner) and defendants entered into an installment real estate contract for the purchase of restaurant property.  The sale price was $338,000 plus 11.5% interest, which translated to payments of about $3,600 per month.  The defendants had difficulty making payments and, after two years, abandoned the property and returned the keys to the plaintiff.  The plaintiff, in turn, filed a breach of contract claim.  The issue on appeal surrounded how to calculate the plaintiff’s damages.  The specific question was whether the plaintiff could keep the real estate and collect unpaid contract payments for the period that the defendants possessed the premises.

Forfeiture.  The Court in Hooker noted that forfeiture is “the divesture of property without compensation.”  In other words, “forfeiture terminates an existing contract without restitution, while rescission of such contract terminates it with restitution [compensation] and restores the parties to their original status.”  Indiana disfavors forfeitures “because a significant injustice can result.”  See, Land Contract Vendee Defeats Mortgagee’s Foreclosure Case.

The choice.  The Court held that the plaintiff had two options in light of the defendants’ contractual default.  First, he could have proceeded “as though he had a mortgage” by accelerating the land contract and foreclosing (if the defendants were unable to pay the full amount due).  The second option was to pursue the remedy of forfeiture, thereby cancelling the land contract and retaining the payments made by the defendants and the real estate (in addition to recouping any actual damages sustained as a result of the transaction).  Indeed it was undisputed in Hooker that the defendants themselves forfeited by abandoning the property and returning the keys to the plaintiff about two years after the execution of the contract.  By then, the defendants had paid less than one percent of the purchase price.  “Under these circumstances, the Contract and [Indiana Supreme Court] guidelines render forfeiture an appropriate remedy.”

Recovery limited.  The plaintiff sought an additional award of outstanding interest for the time in which the defendants occupied the real estate but neglected to make sufficient payments.  The problem was that the plaintiff “elected to have the Contract forfeited - - cancelled.”  Once he made that decision, he was no longer permitted to enforce the contract.  He was only entitled to receive the defendants’ payments made before their abandonment.  As an aside, the Court suggested that the plaintiff essentially sat on his rights for several months by allowing the defendants to remain in possession of the real estate while in default. The Court did, however, approve of plaintiff’s recovery for actual losses associated with tax payments he was forced to make, personal property taken by the defendants and his attorney’s fees and costs. 

Under the circumstances of Hooker, the Indiana Court of Appeals determined that the owner/vendor elected the remedy of forfeiture rather than foreclosure and therefore was prohibited from recovering the missed contract payments that he conceivably could have recovered had he elected the alternative remedy.  One other lesson from Hooker:  normally the contract language will control the outcome, so you or your lawyer must review the written agreement for additional insight into your remedies. 

Land Contract Vendee Defeats Mortgagee’s Foreclosure Case

In the event you ever deal with priority disputes involving an Indiana mortgage and a land sale contract, or related issues, the October 15, 2007 opinion of the Indiana Court of Appeals in Pramco v. Yoder, et al., 2007 Ind. App. LEXIS 2320 (PramcoOpinion.pdf) will be instructive.  The Court denied mortgage holder Pramco’s request to foreclose on property occupied by Jose Arellano through a land sale contract. 

The loan and contract.  Steven Yoder entered into a promissory note with Bank in the amount of $33,000, which note was secured by a mortgage on residential real estate Yoder owned.  The Bank recorded the mortgage on July 31, 2001.  Subsequently, Yoder entered into a land sale contract with Arellano in the amount of $54,000 that got recorded on January 16, 2002, after the recordation of Bank’s mortgage. 

Subsequent loans and defaults.  Yoder and Bank later entered into other loan transactions worth several hundred thousand dollars secured by mortgages on thirteen different properties, including the property in question.  Yoder ultimately defaulted on his loan obligations, and Bank sold/assigned the notes and mortgages to Pramco.  Before this particular case, Pramco had foreclosed on and liquidated all the properties except for the property occupied by Arellano.  The residual debt totaled about $415,000. 

Status of land contract.  Plaintiff Pramco sought to foreclose on the property Arellano occupied pursuant to the land contract.  Arellano already had made, in addition to a $15,000 down payment, thirty-nine other payments for a total amount paid under the contract of about $45,000.  Remember, the original mortgage between Yoder and Bank was for only $33,000. 

The equitable result.  The trial court held that its equitable powers could prevent the injustice that would result from the foreclosure of the mortgage, including specifically Arellano’s forfeiture of the $45,000 he paid pursuant to the land sale contract.  Yoder had used Arellano’s payments to make mortgage payments to Bank. With a foreclosure, all that money would be lost.  And to add insult to injury, Arellano would lose possession of the property.  The Indiana Court of Appeals reasoned that to grant foreclosure would be to grant Pramco a double recovery.

If forfeiture were allowed, Pramco would have received the benefit of Arellano’s down payment, and subsequent monthly payments, which were taken by Yoder to the Bank, which in turn sold the mortgage to Pramco.  Pramco would then be allowed to sell the Property at sheriff’s sale, as Pramco did with the twelve other parcels of real estate, and retain the proceeds from the sale.

Id. at 14.  The Court of Appeals relied, in part, on the landmark Indiana Supreme Court decision in Skendzel v. Marshall, 301 N.E.2d 641 (Ind. 1973) concerning forfeiture/land sale contracts. 

Fair to the lender?  The mortgage Pramco sought to foreclose had been recorded before the land contract, had never been released and had remained unpaid.  Had the competing lien been another mortgage, Pramco would have prevailed.  Land contracts, however, are treated differently in Indiana, and one must remember that foreclosure actions “are essentially equitable.”  Id. at 11.  When trial courts make decisions with regard to equitable remedies (generally, remedies other than money damages), they are not compelled to strictly follow particular rules of law but rather have great latitude to promote fairness and justice.  (Mortgage foreclosure actions seek an equitable court order to sell real estate to satisfy a debt.)  Lenders thus may not always get what they want or perhaps even deserve.  This is particularly true in Indiana when there is a collision of interests between a mortgage holder and a land contract vendee.