Pa. Court Clarifies Rules on Installment Contracts vs. Mortgages

The buyer made a down payment of $12,000 to the then-seller of the property and agreed to pay the remaining $13,000 in monthly payments of $400 each.

The parties memorialized their contract in a writing identifying themselves as “seller” and “buyer,” the opinion said.

It was undisputed that the seller agreed to deed his legal title to the buyer upon payment of the last installment.

The buyer immediately entered into possession of the property and paid the first four installments and paid the real estate taxes due on account of the property for that year as well.

Soon thereafter, the buyer eventually defaulted under the terms and conditions of the installment land contract by failing to make any additional installment payments, the opinion said.

Instead of suing the buyer, a few months after the last installment payment was made, the seller attempted to resell the property to a third party. To this end, the seller executed a deed for the third party for fee simple, which was recorded.

Upon discovering this property transfer, the buyer sued the seller and the third party to have the new deed set aside as against the buyer’s interest in the property based on the installment land contract entered into by the seller and the buyer, the opinion said.

Trial Court Ruling: Installment Contracts Are Not Mortgages

The trial court ultimately granted summary judgment in favor of the buyer and set aside the deed.

The buyer continued residing on the property for several years, the opinion said. Then, in 2013, the buyer removed the mobile home and purchased a new one for $14,000.

In 2020, the seller attempted to reconvey the property to the third party by quitclaim deed, the opinion said. Simultaneously, the seller assigned his right, title, and interest under the installment land contract to the third party. A month later, the third party’s attorney sent a letter to buyer, titled, “Notice of Intention to Foreclosure.”

According to that foreclosure notice, the buyer could cure the default currently in existence as to the installment land contract by sending payment of the amount then allegedly due at the time of the foreclosure notice.

The buyer refused to abandon the property or to pay the third party the amount then allegedly due under the installment land contract.

Afterwards, the third party sued the buyer seeking to eject the buyer from the property, including the new mobile home she purchased and affixed to the land, and to have the installment land contract voided.

Both parties moved for summary judgment. The trial court reiterated that the installment land contract entered between the seller and the buyer was “not a mortgage as it is incapable of being recorded, as required for all mortgages.”

The trial court ultimately granted partial summary judgment to the third party, awarding the third party ownership and possession of the property, but not awarding him any damages.

The buyer timely appealed the trial court’s ruling to the Superior Court.

Among other issues, the Superior Court in Zanicky addressed the buyer’s argument that the installment land contract should be treated as a mortgage, and, therefore, to extinguish her equity in the property, the third party needed to bring an action to foreclose her equity of redemption.

An equity of redemption refers to a borrower’s right to “redeem” or reclaim a mortgaged property by paying off the outstanding debt owed, and thereby preventing foreclosure.

In Zanicky, the Superior Court noted that installment land contracts are often abused and designed to fail, allowing sellers to make more money by finding ways to cancel them so that they can acquire as many property owners as possible.

The Superior Court in Zanicky cited a legal scholar who pointed out that the use of the installment land contracts ballooned after the housing-market collapse and Great Recession of 2008 and that they are now used by large, corporate lenders who acquire thousands of homes across the country to resell them through advantageous installment land contracts.

Noting that the Third Restatement of Property regards installment land contracts as mortgages so that like any other mortgagors, the Superior Court in Zanicky stated that buyers have the right to cure their default or redeem their equity in the foreclosure. According to the Superior Court in Zanicky, if the buyer fails those remedies, they can insist upon a judicial-foreclosure sale, and retain any profits beyond the cost of paying off the debt to the seller.

Due to the trial court’s refusal to treat the installment land contract as a mortgage, the buyer in Zanicky was forced to forfeit her equity in the property, including her downpayment of $12,000, the installment payments of $4,000 made to the seller, the $14,000 new mobile home she purchased and placed on the property, and any increase in the value of the property over the last 20 years since the installment land contract was signed by the parties.

The Superior Court in Zanicky declared that the third party could only extinguish the buyer’s equity in the property by an action for foreclosure, and so the third party erred by only bringing an action in ejectment. In doing so, the Superior Court in Zanicky clarified that based on the relief that the third party sought, namely, possession and legal title unencumbered by the buyer’s equitable title, it was the wrong type of ejectment action for a mortgagee to bring.

The Superior Court in Zanicky explained that, although the third party believed that the buyer forfeited all her rights to the property upon default, this was not true, as the buyer never forfeited her equitable title to the property.

Most importantly, the Superior Court in Zanicky definitively declared that an installment land contract is a mortgage for all substantive and procedural purposes. Therefore, for an assignee to extinguish a buyer’s equity in property, they must bring an action to foreclose the buyer’s equity of redemption.

In conclusion, the Superior Court in Zanicky sided with the buyer and overruled the trial court’s ruling granting partial summary judgment to the third party and incorrectly ruling that the installment land contract was not a mortgage.