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Issue  179  Article  310
Published:  6/1/2010

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Pending Bill - Homeowner and Homebuyer Protection Act
Chris Burti, Vice President and Senior Legal Counsel

Senate Bill 1015 introduced by Senator Josh Stein (D-Wake) was considered in the House Financial Institutions Committee on May 25, 2010. The Committee heard from consumer protection attorneys expressing concerns about consumers who have been mislead by unscrupulous people in either installment land contracts, residential leases combined with options to purchase, or foreclosure rescue situations often utilizing the same or similar transaction structures. Their argument is based upon the supposition that many of these consumers are not sophisticated, will engage an attorney to perform a title search on the property. As a result, they often enter into agreements and make payments to parties who do not have title to the property, and they are also often unaware of liens on the property. The bill would prohibit foreclosure rescue schemes involving an expectation of financial gain by the promoter and create remedial rights under Chapter 75.

It would create a new statute (47G) regulating options to purchase contracts executed with lease agreements on residential property. It would require these contracts to be in writing, contain certain specified disclosure information, provide for a 3 day cancellation period, require disclosure of all mortgages and liens against the property, and require the contracts to be recorded on the land records. The bill provides that one cannot sell an option contract unless they hold title to the property and is the mortgagor on the property, or is a licensed real estate broker. A residential lease/option contract that does not comply with the provision of the Chapter is voidable at the option of the vendee.

The bill would also create a new statute (47H) to regulate installment land sales contracts and contracts for deed. The bill would define such arrangements, specifying that those transactions requiring 5 or more payments in addition to the down payment and having the seller retaining title to the property to secure the purchaser's obligations, are covered transactions. It would require the seller to have title to the property. It would require the contracts to be in writing, contain certain required disclosures, provide for a 3 day cancellation period, would require disclosure of mortgages and liens affecting the property, would require the seller to provide the buyer annual account statements, and would require recordation of the contracts.

One concern in the Bill's present form is that it purports to regulate these practices without dealing with, or providing a procedure, for forfeiture. This creates an ambiguity as to whether it supplants the common law requirement for judicial foreclosure of the equity of redemption or supplements the requirement. In light of the confusion created by the opinion in Marantz Piano Co. v. Kincaid, 108 N.C. App. 693, 696, 424 S.E.2d 671, 673 (1993), consideration of this bill would seem to provide an excellent opportunity to clarify and codify a procedure for extinguishing the vendee's equity of redemption in residential land sales contracts and leases with options to purchase. Such a procedure would provide greater certainty with regard to the status of title after default.

Other concerns expressed with the proposed legislation by the Legislative committee of the Real Property Section of the North Carolina Bar Association is that the version under consideration at this writing of the proposed 47G-6(2), contains an exception apparently permitting a realtor to execute a Covered Option Contract to sell property that the realtor does not own. There seems to be no rational reason for this exception and one may assume that its intended purpose is otherwise.

A further issue appears in the proposed 47G-7 which requires disclosure of mortgages to be made by a "separate written disclosure." It seems reasonable to require the disclosure, but it would seem to be sufficient if it were in a separate paragraph in the agreement. It seems that it should also include language disclosing the potential losses that may be suffered if a disclosed lien on the property is foreclosed.

In the proposed 47H-1(6), a purchaser is defined as a person or an entity, but in proposed 47H-1(7) a seller is defined as a person, but an entity is not included in the definition. This creates a loophole as a seller seeking to circumvent the statute could convey the property to a business entity before entering into the contract with the buyer and that contract would not be regulated by this proposed statute. Given that the definition of Property used in this Chapter is a structure being a principal dwelling for the purchaser, an entity cannot be a purchaser.

The Committee also recommended that:

2) 47H-6 (7) would be improved by adding the status of the mortgage (i.e. in default, foreclosure in progress, etc.)

3) 47H-7(a)(2) should require the agreement be in writing.

4) 47H-8 should list a period of time before a late fee can be charged (i.e. 15 days).

Expressing similar concerns with regard to forfeiture, the Committee recommended that the Legislature add provisions allowing for a nonjudicial foreclosure procedure under Chapter 45. As we intimated above, these instruments are viewed by the courts as mortgages. The committee recommends the creation of a process to replace judicial foreclosure which takes an excessive amount of time and adds a great deal of expense to the parties. As Chapter 45 provides a more streamlined process for foreclosures, it would be better to use that process for these instruments.

In both the proposed 47G and 47H, the Committee recommends that if attorney fees are to be assessed, then they should be assessed in favor of the prevailing party, not just the tenant/purchaser. Further, as any violation of these proposed Chapters would constitute an unfair and deceptive trade practice under the new coordinating provisions of Chapter 75, the language needs to be restricted to cover only material violations as the current proposals could be construed to permit technical but non-damaging violations to be prosecuted and sellers find themselves defending unwarranted, unfair and deceptive trade practice claims.

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