THOUGHT OF THE WEEK Is rent-to-buy the solution?
Updated: Oct 14, 2019
The current economic climate is such that many aspiring homeowners are unsuccessful when applying for a home loan. In the same breath, sellers often experience difficulties achieving the desired price when selling their properties. Fortunately, there is a solution that can assist both the purchaser and the seller.
Rent-to-buy (not a new concept) is a popular option within the housing industry as it can address some of the financial obstacles associated with property ownership. Not only does it prospectively provide an avenue for purchasers who are unable to qualify for a home loan in the traditional way but it may also result in the seller being more likely to achieve his/her desired price as he/she is exposed to a greater pool of purchasers.
How does rent-to buy work?
In simple terms the seller and purchaser will enter into an agreement. This agreement often takes the form of a lease and will either have an Offer to Purchase (“OTP”) included in the lease agreement or annexed to it. The agreement must include all conditions agreed to by the parties. Ordinarily, the lease or the OTP will afford the purchaser an opportunity to exercise an option to purchase. The lease or the OTP will confirm whether the option must be exercised at the end of the lease or whether the purchaser may elect to exercise his/her rights throughout the duration of the lease. The seller will not be allowed to accept any offer made by a third party until the lease has expired.
The following are some of the items which must be agreed to by the parties:
Duration of the lease
The duration of the lease must be clearly set out in the agreement. Ordinarily, the purchaser must exercise his option to purchase the property on expiration of the lease. Alternatively, the agreement may confirm that the purchaser is allowed to exercise the option during the lease.
The purchase price
The purchase price must be agreed to and included in the OTP. If applicable, the parties must agree whether or not the option fee is included in the purchase price.
Ordinarily, the purchaser will be required to pay an option fee at the inception of the agreement. The amount of the fee must be agreed to. This fee will be forfeited in the event of the purchaser not proceeding with the purchase at the end of the lease agreement. There may be additional ongoing option fees which will be charged over and above the monthly rental payment.
The purchaser will be required to pay a monthly rental over and above any other agreed charges and fees. The rental must be agreed to in the lease agreement. It is common for the rental amount to be inflated with the intention that a portion of the rental will be deducted from the purchase price and the balance will be paid to the seller to cover the monthly costs associated with the property. Alternatively, the seller may agree to deduct the full rental amount from the purchase price if the option is exercised.
Rent-to-buy may be the solution to many people’s property woes. However, it is vital to ensure that the agreement is properly drafted to protect both the purchaser and the seller.
In order to navigate the practical effects of rent-to-buy agreements we recommend that you consult an attorney for advice and assistance.