What to do with home systems that are in a rental agreement?

When purchasing a home, the average buyer generally assumes that all the major systems in the home are included in the sale. For example, a home should include a furnace which is a prerequisite for life in Alberta, and the average person does not think of the possibility that the seller doesn’t own the systems in the home.

Let’s think through the emerging trend of system rental and see some best practices around it.

What Systems

Although this list is not exhaustive, I have come across systems such as: a hot water tank, water softener, water treatment/filtration, furnace, alarm system, and even major appliances that are rented and not owned.

The essentials of the idea for renting over owning are low or no upfront costs and small payments over a long period. If a homeowner is cash-strapped but needs a furnace, a rental contract may be attractive because of the lower cost even than financing the furnace itself. The downside of course is that these rental/maintenance contracts can have very long terms, and in some cases auto renew in perpetuity.

Sellers Problem?

Is it the seller’s problem? Well, kind of. The seller is the one who entered into the agreement but in signing the contract with the provider usually includes the right to encumber the property where the systems are installed. This offers security for the rental company that if the homeowner doesn’t fulfill their end of the agreement, the rental company does not need to try and reclaim the product but has security for the full value of the contract, default costs, and legal recovery fees secured against the equity of the property.

Sounds like the seller’s problem then right? Well only until they decide to sell and may or may not have the presence of mind at the moment to recall their agreement several years ago and proceed with a purchase contract as normal.

The Tricky Bits

This is where things get a bit messy. Some of these contracts are registered against the title immediately upon signing, and some are not. As I mentioned before the contract normally gives the property as security but not all companies take the step of adding a caveat to the title until they need to defend their contract. Because of the length of these agreements, it is common for the seller to simply forget about this arrangement, and without a registration on the title is very difficult for buyers and their REALTORS® to know this situation exists in which the seller does not own the home systems they are selling with the property.

If the agreement is on the title, then the buyer and their REALTOR® will be aware and can manage the situation by creating closing clarity through the purchase contract. But if there is no warning on the title the situation becomes stickier in that the company may attempt to pursue the buyer for the agreement fulfillment once the former owners payments stop since the system is in the buyers home.

Protecting The Seller

The AREA Exclusive Seller Representation agreements include a seller’s warranty that the seller has the legal right to sell the property including the attached and unattached goods. As part of the listing process, a REALTOR® should spend some time highlighting the seller’s warranties to see if any of them jogs the seller’s memory. These warranties are very important since they do carry forward into the purchase contract where the seller makes those same warranties in more specific terms to the buyer in the contract. Failure to abide by the warranties they make to a buyer could result in legal action or an issue with the closing of the contract so spending time in review with the seller to ensure they understand the warranties they are making to both the brokerage and the buyer is critical.

Protecting the Buyer

One of the key objectives of the REALTORS® relationship with a buyer is to anticipate potential issues in a trade and highlight those issues for a buyer.

The first due diligence for a buyer is always to pull the land title for a property when writing an offer on that property to verify the legal description, owners, and other information including registrations such as caveats, pending litigation, mortgage registrations, etc. If the property does have a rental agreement attached to one of the home’s systems, it may get caught at this point and can be managed in the offer.

If the agreement is not registered on title, there is no way to know the systems may be rented so the purchase contract seller warranties would offer the only legal cover for those things not disclosed. The buyer may still have to deal with the hassle and legal wrangling of managing the issue after closing if it raises its head, but at least the REALTOR® will have done those things within their power.

Assumptions and Advice

Assuming anything is usually a bad idea but in this case, it can help a buyer save some headaches. From my experience, take it for what it is, if a property has an alarm system, water treatment system, or water softener system it is common to assume these items are rented or on a long-term financing contract. Because of the frequency of these specific ones, it is advisable to ask the seller or the seller’s REALTOR® about the status of those items. Other things such as the furnace, hot water tank, and major appliances are less common to be rented but not impossible so the question could be asked, or during a showing or home inspection look for indications or stickers on the items that could indicate a rental arrangement.

There is no perfect way to guard against every eventuality but knowing that this is even a possibility is one step in the right direction of preventing legal actions, hard feelings, costs, and hassles. It is important to note that concerning all agreements, parties should seek legal advice when managing the rental agreement with a vendor, especially when seeking an early end to the agreement. Not all contracts are the same. Some contracts allow for a buyout, and some allow for an assignment to a buyer, but no buyout. I have even been told that some offer neither! When a rental agreement for a home system is discovered seek sound legal counsel on how to proceed.