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.

Equitable Title

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

Lease, Lease Option, Land Contract?
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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.

Category: Eviction

9 thoughts on “Kentucky Land Contracts: The Eviction Trap

  1. Joe7474837 on said:

    This is an interesting article. But I have to criticize you for using the term “deadbeat” so loosely. I am not a landlord. I have always been a buyer. And its been my experience that you find the least honest people in the selling business. Landlords are well known for being the real deadbeats for not fixing property like they should. In a land contract, which I have done, its possible for a family to see hard times and not be able to keep up the payments. Where will they go? If KY lets them stay aboard for awhile…GOOD. Because there are some things far more important than profit. People need to stop putting money ahead of goodwill. There is no way in Hell I would ever toss a family out on the street if I were a seller. If they had a hard time, I would find them a home, just like I would the stray cat on my doorstep. If my own family has to sacrifice something to help another, then I did my duty. Too damn bad there are so many selfish landlords on Earth. I have seen many.

    • The vendor in a land contract isn’t a landlord, so your biased comments there aren’t relevant (and the percentage of tenants who breach by not paying is far greater than the percentage of landlords who breach by failing to maintain habitability anyway). As for what to do with a vendee (buyer) in a land contract who isn’t making payments, It’s easy to claim you wouldn’t take any adverse actions, but most vendors (sellers) in a land contract are small operators who have a mortgage payment to make and likely the income from the vendee’s payments to them is the only source of income to pay the mortgage with. Often they weren’t able to sell the house otherwise, and turned to land contract in desperation after having to move to keep from making two mortgage payments. It’s highly unlikely you would allow yourself to go into foreclosure or bankruptcy just so a deadbeat vendee could live off you for free. In fact, in that case you’d likely think of much harsher words than “deadbeat” to describe the vendee. If the vendee can’t make the payments, they need to relinquish the equitable title back to the vendor and find an affordable place to live, rather than deliberately take money from the vendor. The point of the article is to warn vendors of how vulnerable they are to this type of abuse by vendees in Kentucky. If you were to try being a vendor or landlord sometime, you’d think very differently.

      • Notsurewhatodo on said:

        This is directed to anyone who can help out. I have some questions as my husband and I have fallen on some serious hard times due to multiple hardship that are medically related. We entered into a “Land Contract” agreement. Long story short…the agreement stated that we had until 2013 to buy the house. We lived in this house for almost 4 years. We got behind almost 3,500 (we love this house and the neighborhood-we NEVER intended to get this far behind but after my husband had surgery, he obviously couldn’t do the work that he once could and then when he got another job he was then laid off.) Needless to say there was nothing more we could do. There is normal wear and tear on the house (needs to be painted…hardwood floors redone..etc) but there is also some damage to the roof and kitchen ceiling due to a leak. And one of the hardwood floors needs definite repair on our end. I don’t mind paying our portion of the payments we are behind-because we aren’t “deadbeats” but we just couldn’t afford it any longer. They evicted us and we didnt fight and have just recently moved without any fight obviously because this isn’t in no way their fault as they have already tried working with us as much as possible, they were very nice up until we moved out. So I am wondering are we responsible for the major things that need to be repaired to the house? Also, they are stating that we caused damage that was already there when we moved in-neither party has any proof of what damage was done or wasn’t done before we moved in. Also the owners of the house put the house up for sale almost 1-2 yrs after us moving in (while the land contract was still active-before the 2013 expiration date..but it obviously didn’t sell) Any help is greatly appreciated. Thank you

        • This is certainly a difficult and complicated situation. I can offer some guesses, but you would want to consult an attorney for solid advice, and to look at the particular language of your land contract. In a regular lease the tenant is normally responsible for damages they cause, but not for wear and tear – the roof, for example would be the landlord’s responsibility unless the tenant did something to damage it. However, this is a land contract, and KY courts say a land contract is basically a mortgage. When a bank forecloses they normally don’t go after any property damages. What the bank does is foreclose and then sell the property and then they may sue for any deficiency – if you owe $100,000 in principal, interest, legal fees, etc. and the property only sells for $70,000, they can come after you for the $30,000 difference. If the seller in a land contract simply repossesses the property without properly foreclosing, I would think it hard for them to show a deficiency other than missed payments and incidentals – however, maybe there is language in the contract about structure damage. Because the seller hasn’t foreclosed properly, though, if it were me I would discuss with an attorney negotiating with them a settlement where I would release my equitable interest (probably done with a quitclaim deed) in exchange for them waiving any claims against me. Because they didn’t foreclose, they probably don’t realize the title is messed up (clouded) if the land contract has been recorded. You could (and should IMO) agree to pay the missed payments as part of the arrangement, and any damages you agree are your responsibility. If the land contract hasn’t been recorded, the attorney could still use the possibility of recording it as leverage. The attorney could also cause them a lot of problems for having evicted you improperly, establish your right to live there, etc. if the sellers don’t agree to a settlement. The buyer in a land contract is really the one more in the driver’s seat in this type of situation in Kentucky.

  2. I have a person that I had a land contract with….they have over and over been late and broke the contract with us..This contract was not recorded at the court house.
    I have miles of paperwork which this person has signed in reguards of paying late charges and catching up payments..The contract states if you miss 60 days you forfeit your rights to such said property and loose all moneys that you put towards this property..I even went to a month to month contract which he signed never to be late or that contract will b voided..guess what he broke that one too…I guess what I need to know is if I have all this paper trail and the contracts that he broke can he take me to court knowing he is in default and I need to evict??

    • I think you need to talk with an attorney. My guess would be that in Kentucky the 60-day forfeiture clause would be voided by a court because of Sebastian v. Floyd. Also, with there being two agreements, whether one replaced the other or was simply an addendum might have to be answered. You certainly have the option to sue over any money which is owed to you. However, to get them off the property and any equitable title they have in the property removed, my thought is that will require a foreclosure action, which would be separate from the money suit. You ask if the buyer (vendee) can take you to court; I think you mean can they force you to go through foreclosure before you can evict and my guess would be yes; but again this is a serious, complicated situation and if it were me I would consult with an attorney.

  3. so you are saying that a land contract is not worth the paper its written on??What good is a paper and agreement if any one can take advantage and live on property for free and the mortgage payments still have to b paid.

    • A land contract can be valid and enforceable; you can sue for the money owed. It’s just that in Kentucky you must foreclose first before you can evict. Some states allow for a quicker forfeiture process, but Kentucky does not – so in that sense, yes, forfeiture clauses in land contracts in Kentucky are actually, unfortunately probably not worth the paper they are written on. I am not advising this, just pointing out that in an eviction hearing the defendant must both make an appearance and raise the land contract (Sebastian v Floyd) defense before a judge would know to deny the forcible detainer judgment. If you were to attempt eviction without foreclosure, the worst that would happen is you’d be out the court costs and a little time, the best would be that the defendant fails to appear and raise the land contract issue so you get a forcible detainer judgment anyway. Your judgment wouldn’t be proper, but somebody has to point out that it’s not proper. If it was me, I would go ahead and sue for the money owed right away, and then begin foreclosure. The lawsuit over the money might at least cause them to decide it’s time to skip out (so I could at least consider renting it – though technically I might not be able to), but there would still be a cloud on the title from the land contract, if the tenant/buyer decided to record it. However, if you try eviction anyway, the cost isn’t that much if it fails, and if the tenant/buyer never records the land contract it might not be an issue. I have to emphasize again, though, that it looks to me like you need an attorney; this is a difficult, complicated, messy situation.

  4. Notsurewhatodo on said:

    Hello, my phone is not working in my favor & posting like this is actually new to me. Please see the comment I made at the bottom of the page. Again, thanks to anyone who might be able to help.

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