The legal issues involved in rent-to-buy

With mortgage interest rates rising steadily this year and Spaniards' strong attachment to the sense of ownership, rent-to-own is becoming a more and more popular option for buying the property you fell head over heels for at first sight or the ideal property for your specific circumstances at that moment in time.

Rent-to-buy is a complex, non-standard contract with no specific legal regulation. It contains two legal agreements (rent and option to buy), which are mutually binding during the period agreed for the purchase.

What does rent-to-own consist of?

As is well known, renting involves handing over possession or use of a property in exchange for a price, called rent.

The option to buy is a preparatory agreement to the sale agreement, being defined by case law (as it lacks express legal regulation) as an agreement by which one party (the owner or grantor) grants another party (grantee) the exclusive power to decide whether or not to enter into the sale agreement, which must be carried out within a certain period and under agreed conditions, and which is usually accompanied by paying an option premium (or advance payment) by the tenant-grantee party.

It is, therefore, a single contract, which contains two legal agreements (a lease and the tenant's option to purchase) linked during the period in which the tenant or grantee has the power to exercise the option to buy, the latter being considered expired or terminated if it is not carried out within the agreed period.

What is the contract's development and its main features?

Once the property owner and the lessee, tenant or grantee have agreed on the same contract, the following circumstances should be foreseen in general terms. However, it is always advisable to get the contract drawn up by a lawyer specialised in real estate law, who will outline the contracting parties' true intentions. It is always best to avoid "pre-drafted" models or forms since the complexity of this type of contract is due to the special, and sometimes even exceptional, circumstances of those who formalise it.

On the lease

• Description of the property covered by the contract and its use or purpose.
• Term, respecting the term established by the law in force when the contract is formalised, and which may even be longer than the term granted for the purchase option, but not less than that required by law, and at the discretion of the lessee, for whom only the first six months are obligatory.

• Date of entry into force of the lease, which does not have to coincide with the date that appears at the beginning of the contract.
• Deposit amount and, if applicable, its application to the purchase price if the purchase option is finally exercised.
• Compensation payable to the landlord-owner in case the tenant withdraws from the rental contract and after the first six months have elapsed since it entered into force.
• Obligations regarding the payment of services and supplies and repercussions on the tenant during the lease's term, as well as taxes and/or fees (property tax, rubbish tax).

And any other issues and clauses that may be of interest to the parties regarding the lease they have agreed to, provided that they comply with the law.

On the option to buy

• Granting the tenant-grantee the right to decide unilaterally whether or not to purchase the property on which the tenant has agreed to rent.
• The specific period during which the lessee-grantee may exercise the right to purchase, which may not be longer than the agreed rental period and its compulsory extensions, although it may be shorter.
• The agreed selling price.
• The payment of an amount as an option premium (understood as if it were a down payment for a sale and purchase, and given that an exclusive right to purchase is granted to the lessee), and the operation of the same: its loss or total or partial reimbursement if the lessee does not choose to buy.
• Percentages or instalments of the rent to be applied, as a discount, together with the option premium or "down payment", to the agreed purchase price, as well as its progressiveness, depending on when the purchase option is exercised, understanding these as discounts on the agreed price. It is possible to specify whether or not these bonuses or discounts on the price will be applicable in the event of non-compliance by the lessee during the duration of the lease.
• Distribution of the costs and taxes of the future sale, usually as follows: all of which are to be paid by the buyer, except for the Tax on the Increase in Value of Urban Land ("plusvalía municipal"), which will be paid by the seller.

And, as in the case of the lease, any other clauses of interest to the parties.

On the connection between the lease and the purchase option and some common clause

It is always advisable to establish whether the purchase option that is granted, and which is not obligatory for the tenant, as the word option itself indicates, will be annulled if there are breaches by the tenant of the obligations agreed through the rental contract, especially those of a financial nature.

If the contract outlines the rent-to-own option, it may be registered in the Land Registry and must specify who will bear the costs arising as a result of the public registration of the contract and subsequent registration, as it is usually agreed that the person who has taken the initiative for said registration to take place will bear the costs.

Issues of interest

The term for exercising the option can expire, meaning that if it is not exercised within the agreed term, the right granted to the purchaser to buy the property disappears, even if they continue to rent it.

Once the option has been exercised in the manner foreseen and agreed by the parties (it is advisable to do so via burofax), the purchase is consummated, automatically completing the purchase contract, although the property and the price have not been received, and the lease is extinguished.

The Supreme Court has established that the sale is complete once the right of option has been exercised by the lessee within the agreed period. From that moment, the seller may request the other party to execute the deed and pay the agreed price. It is, therefore, not appropriate to declare the eviction of the lessee for rent non-payment and make them pay rent later than exercising the option in due time and form.

A note on rent-to-buy contracts

I have witnessed countless contracts that state that if the option to buy is exercised, the total amount paid as rent will be deducted from the agreed price.

From my point of view, and because "common legal sense is the most common of the senses," contracts that provide for this type of agreement may be classified as "sale by instalments", with interest-free financing or at €0 interest, but in no way should they be considered as a lease with an option to buy, since it must be understood that with the obligations contracted by the owner granting the option - prohibition to dispose of the property offered and to maintain the offer that is binding for them - some benefit, however small it may be, must be obtained from this complex legal business, which would be determined by the parts or instalments of rent that is not finally discounted from the agreed price.