What Path Did the Moneylenders Take?

A sale and purchase agreement is the most common legal relationship through which the seller transfers ownership rights to property, while the buyer pays the agreed price. The buyer and seller agree, within their discretion, on the price, place of performance, time, and other essential terms of the sale. In addition, the parties have the right to agree in the contract on a right of repurchase.

In the presence of a right of repurchase, the seller regains ownership of the property, while the buyer returns the received amount. This is a right of the seller, which operates only if there is a direct agreement on this in the contract. A contract with a right of repurchase may be concluded for a maximum of 10 years. The seller repurchases his sold property at the original price.

It is possible that the value of the property increases before the moment of repurchase, for example, if the buyer incurs expenses, such as carrying out a major renovation of a residential apartment. In such a case, the buyer has the right to demand, at the time of repurchase, the amount by which the value of the property has increased. The opposite is also possible: after a certain period, the value of the property may decrease, and the repurchaser may demand a deduction of the decreased value from the price. If, before the moment of repurchase, the buyer damages, alters, or otherwise affects the property in a way that reduces its market value, the buyer is obliged to compensate for such damage. Also, if the buyer alienates the item before the exercise of the right of repurchase, such alienation is void.

It should be noted that in practice, there are frequent cases where a sale and purchase agreement with a right of repurchase is concluded, but in reality, the purpose of the parties is to disguise a mortgage agreement. This may create problems for the person holding the right of repurchase, because if they do not exercise the repurchase of the subject of sale within the period specified in the contract, they lose the right of repurchase, which, as a rule, the owner does not realize. It is also noteworthy that, unlike a mortgage agreement, in the case of a sale and purchase agreement with a right of repurchase, if the person does not pay the repurchase amount, they do not acquire any claim regarding the subject, and accordingly, cannot demand the realization of the subject in case of non-payment and, after the creditor's claim is satisfied, the transfer of the remaining amount to them, as is provided in a mortgage agreement. Accordingly, the real owner of the subject of sale loses both the ownership right to the item and the right to claim the remaining amount from the realization of the item, since the new owner becomes the full owner of the item after the expiration of the period provided for repurchase.

For example, if real estate is actually worth $50,000 and a person wants to take a loan secured by this property, and the loan amount is, say, $25,000, if the owner of the item enters into a sale and repurchase agreement, they will be able to repurchase the property for this amount within the period specified in the contract. However, if the person cannot pay the repurchase amount within this period, after the expiration of the period specified in the contract, the person will lose the right of repurchase and will not be able to demand the realization of the item, which means that the $50,000 property will be alienated for $25,000, whereas in the case of a mortgage agreement, the person could demand the realization of the subject, satisfaction of the creditor, and transfer of the remaining amount to them. Therefore, when parties conclude such types of agreements, they should analyze all the risks that may arise from this type of contract.

In the event that a sale and purchase agreement with a right of repurchase covers a mortgage agreement, such an agreement will be declared void by the court as a sham transaction, if the party seeking to have the contract declared void in court proves that the purpose of the sale and purchase agreement with a right of repurchase was to cover a mortgage agreement.