Rent-to-buy contract argued before Indiana Supreme Court

A dispute that could have a far-reaching impact on the sizable rent-to-own housing market in the Hoosier state was presented to the Indiana Supreme Court on Thursday morning with attorneys arguing over the nature of the rent-to-own contract.

The case, Rainbow Realty Group, Inc. and/or Cress Trust v. Katrina Carter and Quentin Lintner, 19S-CC-00038, has zigzagged its way through the state court system. After Center Township Small Claims Court in Marion County granted Rainbow’s petition for possession and damages of the home that had been occupied by Katrina Carter and Quentin Lintner, the Marion Superior Court granted summary judgment to the couple. However, the Indiana Court of Appeals reversed, finding Rainbow was selling, not renting, the property to the couple.

Along the way, the case has attracted attention. The Indiana Attorney General and the city of Indianapolis each filed amicus curiae briefs in support of Carter and Lintner as did the Indiana Association of Community Economic Development, the Neighborhood Christian Legal Clinic, the Economic Justice Project of Notre Dame Clinical Law Center and National Consumer Law Center, and the Fair Housing Center of Central Indiana.

Carter and Lintner signed a rent-to-own contract with Rainbow in 2013 for a home on the east side of Indianapolis. The couple was responsible making the $549 monthly payments, at in interest rate of 16.3 percent, along with all repairs to the residence, which had no electricity, plumbing or locks on the doors. When Carter and Lintner fell behind in their payments, Rainbow eventually started eviction proceedings.  

Representing the couple, Indiana Legal Services contended the contract Carter and Lintner signed was a rental agreement and Rainbow violated the state’s landlord-tenant act by not providing a habitable residence. For the first 24 months, the couple were to make monthly payments but would not build equity in the property and would be subject to eviction, not foreclosure, if they failed to meet their financial obligations.

Rainbow countered the agreement was a contract of sale with the first two years of payments serving as the down payment on the home. Then the agreement would convert to a land sales contract.

During oral arguments, Rainbow counsel, Karl Mulvaney, partner at Bingham Greenebaum Doll LLP, reiterated the contract was a purchase agreement and, therefore, not covered by the landlord-tenant act.

Justice Mark Massa seemed skeptical, asking Mulvaney, “If you’re going to do it that way, why not sturcutre it as a land contract? I mean, this is chock full of terms (like) rent, landlord, eviction, proceedings. I mean, how is this not a rental agreement when it’s full of terms like that?”

Mulvaney responded the seller was very clear at the beginning that the payment would be applied to the overall sales contract. The first 24 months of payments were part of the financing arrangement because the couple did not have to provide a down payment.

The justices then pressed the attorney on what comes next with the second contract. Mulvaney argued the second contract was part of the “overall integrated transaction.”

Justice Geoffrey Slaughter asked, “What are the terms of the second contract, is it even in the record?”

Mulvaney replied it was not included, to which Chief Justice Loretta Rush noted few of Rainbow’s clients were successfully completing the terms of the 24-months and getting to the second contract.

“Well, the fact that they get there or don’t get there really isn’t important,” Mulvaney said.

Jon Laramore, executive director of Indiana Legal Services, told the court the rent-to-buy contract was structured to avoid the consumer protections offered in the state’s Landlord-Tenant Act, Indiana Code section 32-31-3-7. Although the contract is structured to mimic or look on paper like a sale, he said, the provisions make the agreement a lease.

“This is really set up to avoid the habitability protections that the Legislature has decided should apply in situations like this,” Laramore said. “The Legislature says you have to provide habitable housing and that right cannot be waived.”

Slaughter quarried Laramore as to the court’s role in the dispute. “Why shouldn’t we conclude that this transaction was carefully structured in such a way, with clever lawyers to avoid the application of the statute,” Slaughter asked. “They found a loophole. The responsibility for closing that loophole belongs with the Legislature and not with us. What is wrong with that approach?”

Laramore replied, “I would suggest that’s not consistent with the Legislature’s intent in this statute. The Legislature passed a very broad law. The definition of ‘rental agreement’ is very extremely broad. It covers many things and the exceptions are very narrow.”

Video of the oral arguments is available here.