That is a very interesting scenario.  Of course, real estate law is different in ever state and I'm not licensed to practice in Michigan.**   But in Ohio, I think there are two separate issues here.  First is the tenants rights under the lease.  If the lease was executed after the mortgage was recorded (or otherwise subordinate) then the foreclosure terminates the lease.  The successful purchaser would be entitled to possession and could evict the tenants.  However, it has also been held in Ohio that tenants' right of possession survives the foreclosure unless they were made parties to the foreclosure.  Although this seems to be a minority rule, it would be safer to include "unknown tenants" in any foreclosure action (in my opinion).

The second issue is whether the "purchase" part of the "rent-to-own" agreement is enforceable.  This one is even less clear.  Personally, I do not like rent-to-own contracts.  They are hybrid leases/land contracts, and whether they are enforceable in a case like this depends on how the court construes the document.  If it is a lease, the result is the same as above.  If it is a land contract and if the vendee was in possession, the possession serves as notice to third parties of their interest in the property and that is as good as recording.  So, if the buyer is in possession when the mortgage was recorded, the buyer would have priority.  If not, then they may have a claim but it would be subordinate to the mortgage.  Either way, if they hold a "land contract" then they should be included as parties in the foreclosure.  (Another reason to serve "unknown tenants," because you aren't always aware of the extent of interest those tenants may claim.).

In deciding whether it is a lease or a land contract, I would look at the terms.  Does it require installment payments for more than one year?  Does it require that the seller deliver title to the buyer upon completion of the payments?  If it does, then it smells more like a land contract to me.  Of course, who knows what a judge would decide.

Thanks for sharing the story.

Best,
Robert A. Franco
SOURCE OF TITLE

** Obligatory Disclaimer:  The contents of this post are not to be construed as legal advice.