In this article we will analyse the rent to buy option. This stands out as an attractive option in the current climate where the Spanish property market is undergoing a freeze (mainly from a financial point of view) for the successful completion of purchase transactions, and with appealing advantages for both parties, the buyer and the seller.
Essentially, we are faced with a type of leasing contract that provides the right to occupy a dwelling in exchange for rent, and under this contract as an ancillary provision the landlord grants the tenant the right to acquire the leased dwelling, the terms and conditions being stipulated by mutual agreement.
This type of contract “Rent to buy,» historically derives from common law (rent to own). In the Spanish legal system there are no specific regulations governing these contracts, but we are faced with; the freedom to agree terms and conditions, regulations governing similar contracts (leasing and option to buy), together with developments in terms of case-law.
Specifically, The Spanish Supreme Court defines ‘rent to buy’ as an agreement whereby one party grants another the exclusive right to decide whether or not the main purchase contract shall be executed, the main features of the contract being:
- To grant the potential buyer the right to unilaterally decide whether or not to proceed with the purchase option
- To establish the subject of the agreement (being the leased property)
- To fix a pre-established price for the future acquisition;
- and, to determine the timeframe in which the purchase shall take place
The following provisions are accessory elements and may be freely agreed between the parties:
- To establish a purchase option premium, that is to say an amount for the exclusive right to acquire the leased dwelling which shall be awarded to the landlord by the tenant potential buyer, or by contrast that this right shall be free of charge
- Likewise, to establish that rental payments shall be considered as a downpayment to the final price, this is also negociable, not only as a totality but also as any percentage that the parties may decide to deduct from the final price
The advantages for the tenant-potential buyer under the let to buy regime would be, among others:
- To be able to establish a pre-fixed maximum purchase price
- To be able to decide whether or not to proceed with the purchase (i.e. depending on the fluctuation of market prices)
- The rental payments are not lost funds
- To be able to verify the quality and characteristics of the dwelling prior to purchase
- To be able to get a feel of the neighbourhood and community prior to purchase
For the owner, and as stated in the title of this article ‘rent to buy’ implies the possibility to sell the property in the future whilst obtaining regular revenue (rent).
Depending on the timeframe established for executing the purchase, together with how the interests of the owner and tenant-potential buyer are protected, it is possible to either agree on a fixed purchase price, or by contrast to choose between a range of formulas to adapt the final price to the period of time stipulated for the purchase to take effect, and the possible fluctuations that may occur within this timeframe to the property market in the area the dwelling is located. The negotiation and inclusion of these kind of provisions in let to buy contracts can lead to significant profits or losses when the purchase-sale goes through.
Appropriate advice from a legal professional with expertise in the field of Property Law can prevent risks when carrying out these kind of transactions, and protect your legal and financial interests, as much for property owners as for tenant-potential buyers.
Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice.