Sale with the Right of Redemption as a Fraudulent Transaction

A sale with the right of redemption agreement is often used as an alternative to loan and mortgage agreements. However, the parties should be aware that this approach carries serious legal risks.

The purpose of this article is to explain the risks associated with entering into a sale with the right of redemption agreement and to clarify under what circumstances a court may consider such a transaction a fraudulent transaction.

What Does Sale with the Right of Redemption Mean?
Unlike a classic sale, the key feature of a sale with the right of redemption is that the seller retains the right to repurchase (redemption) the sold property within a specific period. Meanwhile, the buyer is not allowed to refuse the payment of the price or the return of the property to its original owner.

The exercise of the redemption right depends on the will of Seller, in which case the repurchase occurs at the initial price. Additionally, the buyer has the right to claim any increase in the property’s value that occurred up to the moment of redemption. On the other hand, the seller has the right to demand the deduction of any amount by which the value of the property decreased before redemption.

Risks of a Sale with the Right of Redemption Agreement
If the seller fails to exercise the redemption right within the agreed period, they lose this right entirely, and full ownership of the property is transferred to the buyer. Therefore, failure to redeem the property within the set period results in the loss of ownership rights.

This mechanism is particularly used by parties seeking to avoid tax obligations and disguise loan and mortgage agreements. In such cases, the seller essentially attempts to obtain a loan, while the transaction is formally structured as a sale. If the buyer (in reality, the lender) acts in bad faith and deviates from the actual agreement, they can refuse to return the property after the redemption period expires. The seller, in turn, will be unable to reclaim the property, as a sale with the right of redemption is a legally valid basis for acquiring ownership rights. Meanwhile, if a loan and mortgage agreement had been used instead, the seller would have had a more effective legal mechanism for protection.

Advantages of Loan and Mortgage Agreements
The advantage of loan and mortgage agreements is that the borrower’s real estate is mortgaged in favor of the lender, but ownership remains with the borrower. If the borrower fails to meet their obligations, the lender has the right to demand the sale of the mortgaged property. Moreover, if the property is sold at a higher market price, any remaining funds after satisfying the creditor’s claim are returned to the borrower.

If a sale with the right of redemption agreement is used as a means to secure a loan and the seller (the actual owner) faces difficulties in repaying the amount, the property will pass to the buyer at a pre-agreed price. If the real market value of the property is significantly higher than the loaned amount, the seller will not be able to recover the difference. However, through a mortgage loan, the borrower retains ownership rights and receives the remaining amount after the creditor is satisfied, making it a more effective and secure mechanism for protecting the borrower’s interests.

When Is a Sale with the Right of Redemption Considered a Fraudulent Transaction?
A court will consider a transaction a fraudulent transaction if it is executed merely for appearance and neither party intends to adhere to its actual legal consequences. A sale with the right of redemption agreement may be declared invalid if a party can prove that the agreement was actually intended to cover up a mortgage loan.
The court will review the case upon the request of one of the parties, requiring proof of all circumstances indicating that another transaction was intended and that the essential elements of the concealed transaction were present. In such cases, the claimant must prove the existence of a loan and mortgage agreement, while the respondent bears the burden of proving the existence of a sale with the right of redemption agreement.

The burden of proof typically depends on witness testimonies and their credibility. Furthermore, a sale with the right of redemption does not always conceal a loan and mortgage agreement. Therefore, in each specific case, it is necessary to evaluate whether the key characteristics of a loan agreement are present, such as interest (monthly payments), the price of property, the amount received as a loan, its reasonable correlation with the value of property, and other relevant factors.

Thus, using a sale with the right of redemption agreement as an alternative to a mortgage loan can be highly risky and may result in unfavorable legal and financial consequences for the parties involved.

Remember, choosing the wrong transaction structure can lead to significant legal and financial risks. If you find yourself in such a situation and believe your rights may be violated, seek qualified legal assistance in a timely manner to protect your interests.
 

Author of the article: Leila Liparteliani