True Lease OR Disguised Finance Agreement in the Mobile Home Industry
By: Kristen Wills – North Carolina Licensed Managing Attorney
with Brownlee Whitlow & Praet
A determination of whether a Mobile Home Lease to Own Agreement is a true lease or is a disguised finance agreement is crucial in determining a housing providers’ rights and remedies when a default occurs, especially in a bankruptcy matter. If the Mobile Home Lease to Own Agreement is a true lease, the debtor would be required to assume or reject the lease in a Chapter 13 bankruptcy plan. Assuming the lease would require the debtor to remain responsible for the obligations under the lease, including the obligation to pay rent. A rejection would allow the debtor to terminate the lease and vacate the premises. Ultimately in a true lease situation, the housing provider would have the right to re-take possession of the Premises via state Landlord Tenant laws. On the other hand, if the Mobile Home Lease to Own Agreement is a disguised finance agreement, then the debtor may have rights to ownership or ongoing possession and potentially seek declarations via a separate Adversary Proceeding. Where you have a finance agreement, the Creditor needs to make sure that they have a perfected security interest in the collateral for said financing. If the security interest is not perfected (through proper filings and documentation) and the borrower defaults or files bankruptcy it becomes exceedingly problematic to collect or regain the collateral.
A true lease is a rental contract where the owner of the mobile home retains ownership interest and rights throughout the entire tenancy and thereafter. A disguised security interest could be found in an agreement labeled as a “lease”, but which actually functions as a finance agreement. So how do you determine which one you are dealing with?
Distinguishing Between a True Lease and a Finance Agreement
- Must determine whether the payments are being made for use of the mobile home or made for the ownership of the mobile home. Are the rental payments being applied against the purchase price of the mobile home?
- If the resident can terminate the lease at any time and return possession of the mobile home, it is a true lease.
- If the lease is for the entire economic life of the leased mobile home, with or without renewal, the agreement is going to be considered a finance agreement.
- If the owner of the mobile home obtains the property back at the end of the lease, it is a true lease. However, if the resident is able to keep the mobile home at the end of the lease, at no cost or for a nominal price, it is a disguised finance agreement.
To create a true lease or an Option to Purchase Lease Agreement under North Carolina law, the housing provider should ensure the lease term is shorter than the economic life of the mobile home. The housing provider should ensure the monthly rental rate does not equate to the cost of the mobile home and at the end of the lease term the option purchase price is market value. Additionally, Chapter 47G of the North Carolina General Statutes requires specific minimum contents of the option contract in order to be a valid Option to Purchase Lease Agreement.
*The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information in this article is for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. Viewers of this material should contact their attorney to obtain advice with respect to any particular legal matter. No viewer of this material should act or refrain from acting on the basis of information in this presentation without first seeking legal advice from counsel in the relevant jurisdiction. Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this article does not create an attorney-client relationship between the reader and Brownlee Whitlow & Praet, PLLC or any contributing law firms. All liability with respect to actions taken or not taken based on the contents of this article are hereby expressly disclaimed.