A popular alternative to buying high cost merchandise such as appliances, furniture, and electronics outright, is a rent-to-own (“RTO”) transaction. In an RTO transaction, consumers rent merchandise and at a certain point, they can obtain ownership of the item.
However, rent to own can also refer to larger rental property, such as homes. Rent-to-own agreements, also referred to as lease-to-own agreements or lease-options, are traditional lease agreements that give the tenant an option to purchase the rental property. This property is generally a single-family house.
An RTO transaction has some potential benefits, such as a reasonably priced home for a tenant who might not otherwise qualify for a mortgage. The arrangement could also provide some certainty in terms of a potential sale for the landlord, without needing to first market the property and hire a real estate agent.
Rent to own property is not regulated at the federal level; meaning, there are no federal rent to own laws. There are two proposed laws that are waiting for Congressional approval: the Rent to Own Protection Act, and the Consumer Rental Purchase Agreement Act.
The Rent to Own Protection Act intends to regulate rent-to-own as credit sales. What this means is that federal laws would also apply to rent-to-own transactions. Examples of such laws include the:
- Truth in Lending Act;
- Equal Credit Opportunity Act;
- Fair Debt Collection Practices Act; and
- Fair Credit Reporting Act.
Laws associated with RTO property will be further discussed later on.
What Are the Benefits of Rent to Own Transactions? What Are the Drawbacks of Rent to Own Transactions?
Consumers may enjoy many benefits associated with rent to own transactions. Some common examples of such benefits include, but may not be limited to:
- A full cash payment is not required at the time of taking possession of the property;
- Rent-to-own is available to those who have poor consumer credit;
- Because of weekly or monthly installment payments, the renter has immediate use of the merchandise they are renting to own;
- There are no repair costs during the rental period, because the rental company performs any necessary repairs; and
- Items can be returned with no further payment obligations.
However, it is imperative to consider the drawbacks associated with rent to own transactions. The largest drawback would be that the final purchase price for an item bought through rent to own is generally much higher when compared to the item being purchased with a single payment at a retail store. The same applies to items purchased with store financing. The final cost to the consumer can be three to four times greater.
What Does the Law Say about Rent to Own Transactions?
As previously mentioned, there is current legislation awaiting Congressional approval associated with rent to own transactions. The rent-to-own industry is lobbying in favor of the Consumer Rental Purchase Agreement Act. The Act defines rent-to-own operations as a lease, which would override existing legislation in states that maintain stricter consumer protection laws for rent-to-own transactions.
47 states maintain laws regulating rent-to-own transactions. These laws require that businesses must disclose to customers all of the rules that rent-to-own contracts must adhere to. An example of this would be how California maintains the Karnette Rental-Purchase Act. This specific Act defines the terms of rent-to-own agreements, as well as provides consumer protection provisions. It is considered to be illegal for rent-to-own businesses to enter into agreements in which the total of payments toward an item exceeds 2.25 times its cash price.
There are only four states that do not have working rent-to-own legislation:
- New Jersey;
- North Carolina; and
There are some exceptions. While Minnesota does have rent-to-own legislation, the Minnesota Supreme Court has ruled that rent-to-own agreements are also considered to be a credit sale. As such, these sales are limited to an 8 percent annual rate of interest. According to the Association of Progressive Rental Organizations, this lack of legislation paired with adverse judicial rulings have severely restricted the growth of rent-to-own businesses. In the case of Minnesota, these rulings have done away with the rent to own industry entirely.
As previously mentioned, although each state has variations in terms of what must be disclosed in a rent to own contract, they generally include the following disclosures:
- The number of payments that are necessary to acquire ownership of the property;
- The due date of the payments, as well as the terms of payment, such as whether payments are to be made monthly;
- A statement providing clarification that the renting consumer will not legally own the property until all necessary payments are made;
- The actual cash price of the merchandise; and
- A statement indicating whether the merchandise being rented is new or used.
How Do Rent to Own Companies Repossess Merchandise?
One of the main rent-to-own legal issues would be the matter of repossessing a rented property when the renter falls behind on their payments. Because the rent to own merchandise will most likely be inside the renter’s residence, rent to own companies cannot enter their property and remove the item without their permission. Doing so would be considered an act of trespass.
As such, there are multiple tactics that rent to own companies employ in order to regain possession of the item, without committing trespass. However, it is important to remember that what may be considered legal in one state, may be considered illegal in another. Below are some of the most common examples of tactics used by rent to own companies:
- A rent to own representative informs the customer that the merchandise is being picked up for repairs or is being upgraded, when in fact it is being repossessed;
- The rent to own company may employ an attorney to sue for breach of contract, which importantly allows for the recovery of attorney fees, and attempt to get a judgment for the total amount of money for the merchandise plus legal fees. The rent to own company will then file that judgment, and attempt to collect the judgment against the renter. It is important to note that the judgment lien will give the rent to own company the legal right to take possession of the personal or real property of the renter in order to satisfy the judgment against the renter;
- The rent to own company will threaten a customer, saying that if they do not consent to repossession, the company will prosecute them for failure to return rental property; and
- In advance of the rent to own contract signing, the customer may be required to consent to entry into their residence in order to reclaim the merchandise if the customer defaults on their payments.
Do I Need a Lawyer?
Whether you are a business wanting to offer rent to own options to your customers, or you are a consumer experiencing issues associated with your rent to own agreement, you should consult with an experienced and local business lawyer.
A local and experienced business attorney can help you determine your state’s specific laws regarding rent to own agreements, and can advise you regarding your rights and legal options under those laws. Finally, a business attorney will also be able to represent you in court, as needed, should any legal issues arise.