Kentucky Land Contracts: The Eviction Trap
A land contract, or contract for deed (or several other phrases which all mean the same thing) is often turned to as a solution to owner-finance property over time. However, it is a more complicated matter by far than a lease, or even a lease with option to purchase. This is especially true in Kentucky, where the courts treat land contracts differently than many states. I see the question many times: how do I evict someone who has gotten behind on payments for a land contract? In Kentucky, you won’t like the answer.
In a land contract something happens which does not occur in a rental; the seller (vendor) is granting some amount of equitable title to the buyer (vendee). Rather than give technical legal definitions, some examples: if you place your property in a land contract, it would be wrong for you to sell that property to someone else (you could sell your interest in the contract, but not the property), and it would be wrong for you to enter another land contract with someone else for the same property. Why? In short because the first buyer in the land contract has rights; you can’t sell those rights out from under them because they have equitable title even if the property is still in your name. Equitable title gives them a legal interest in the property title; that legal interest isn’t the same as someone who simply owns title to a property (commonly as fee simple), but it is significant. With a renter if you lease a house to someone, you can still sell the house. You’ve given the renter right of possession, but no interest in the title. A lease with option to purchase does give some equitable title to the tenant, but less than a land contract; you can’t enter another purchase option with someone else on the same property – however, it might
be possible for you to sell the optioned property as long as the rights of the option are still in place. Many property owners, though, make the big mistake of entering a land contract to move a property thinking it’s as easy to reclaim possession as it would be in a lease or lease option. A related mistake is drafting something the landlord calls or thinks is a lease option but is actually a land contract. If it functions like a land contract (looks like an installment sale), calling it a lease option doesn’t make it one. Consult an attorney.
Eviction, Forfeiture and Foreclosure
Eviction is a fairly straightforward process (see How to Evict a Tenant in Kentucky) that in Kentucky can take as short as just under a month to get to the point where the tenant is physically tossed out by the sheriff if done correctly. However, just like a bank can’t evict someone if they miss a mortgage payment, a vendor (seller) in a land contract can’t either. In many states, the vendor can either file a forfeiture or foreclosure process. They will typically have language in the contract allowing for forfeiture. A forfeiture filing seeks to either get the past due money caught up (and if so, the land contract proceeds normally) or if not the title is returned to the vendor. While more complicated than an eviction, it is much simpler, faster and cheaper than a foreclosure. Foreclosure accelerates all the money owed on the note when the buyer/vendee has fallen behind and seeks a sale of the property (typically going back to the vendor) if the debt isn’t paid off entirely.
But Not in Kentucky: Sebastian v. Floyd
There are two big problems for sellers in land contracts in Kentucky: a forfeiture proceeding is not a viable option, and Kentucky is a judicial sale state. In 1979 the Kentucky Supreme Court ruled that a land contract was, in essence, little different than a mortgage (Sebastian v. Floyd, 585 S. W. 2d 381 (Ky. 1979)):
When a typical installment land contract is used as the means of financing the purchase of property, legal title to the property remains in the seller until the buyer has paid the entire contract price or some agreed-upon portion thereof, at which time the seller tenders a deed to the buyer. However, equitable title passes to the buyer when the contract is entered. The seller holds nothing but the bare legal title, as security for payment of the purchase price.
The Sebastian decision goes on to explain that means there is no practical distinction between an installment land contract and a purchase money mortgage (like from a bank or mortgage company). For all practical purposes, that rules out forfeiture actions in Kentucky as a way to deal with a deadbeat who isn’t making payments on a land contract – leaving only foreclosure. Some states are non-judicial foreclosure states, meaning there is some prescribed method of notice and sale that can be followed without necessarily having a full foreclosure suit. Kentucky is a judicial sale state, though. It’s the full foreclosure process, from lis pendens filing on through the sale at the “courthouse steps” by the master commissioner.
Not until you have finished the foreclosure process in Kentucky can you seek eviction of the former buyers under a land contract if they still occupy. This can take 6-12 months, and most likely you’ll need an attorney to accomplish it. In my opinion, the Sebastian decision eliminates the land contract as a reasonable owner financing option in most cases (the exceptions being if the buyer puts down enough – like 20% or more – that it’s worth going through foreclosure if they default).
Too often I’ve been in forcible detainer (eviction) hearings and seen a case where it becomes apparent that there is a land contract instead of a lease or lease option and the judge will have to find in the deadbeat’s favor. The judge will urge the unsuspecting seller to seek an attorney as quickly as possible, but is prohibited from giving legal advice. Most in the room, especially the victim, other than the judge, attorneys and myself, don’t have any clue as to how serious a problem there is. Don’t be that unsuspecting victim – if you enter into a land contract, know that in Kentucky the deck is stacked heavily in favor of the buyer and that if things go wrong there is no quick or easy remedy – neither eviction nor forfeit – available to you.