Rent to buy: All you need to know about this business deal in Spain

Gtres
Gtres
26 September 2019, Redaction

Renting with the option to buy is one of the most recurrent contracts today in Spain, although it isn't as easy as it seems.

It is an atypical complex contract, which has no specific legal regulation, as it is a contract that contains two legal businesses (renting and purchase option). These are linked to each other, as long as the option is not exercised by the optant-tenant, or the same expires by the period stipulated by the parties, without being exercised, as recalled by the licensed lawyer Carmen Giménez, from G&G Abogados.

What does renting to buy consist of?

Renting consists of handing over the possession or use of a property, in exchange for a price, which is called rent.

The purchase option is a preparatory business for the purchase-sale business. It is defined by jurisprudence (in the absence of explicit legal regulation) as an arrangement or agreement by which one party (the property or grantor), grants another (optant) the exclusive power to decide whether or not to enter into the purchase-sale contract. This will have to be made within the terms and conditions of the agreement, and which is usually accompanied by the payment of an optional premium by the optant.

Therefore, it is a single contract that contains two legal transactions linked during the period in which the lessee or optant has the power to exercise the purchase option. The latter being considered expired, if not exercised within the stipulated period.

What is the development of the contract and its main characteristics?

Once the property owner and the optant tenant agree, the general circumstances listed below must be provided in the same contract. Although, it is always advisable that the contract is drafted by a lawyer who specialises in real estate law. They can collect the true intention of the contractors. "Pre-drafted" models or drafts should be avoided as the complexity of this type of contract includes special and exceptional circumstances

  • The renting:
  • Description of the property stated in the contract, its use or location. 
  • The term, respecting the established law in force at the time about contract formality, and which may be even longer than the term granted for the purchase option. But no less than that required by law, and at the discretion of the lessee, for whom the first 6 months are mandatory.
  • The effective date of the rental, which does not have to coincide with the date that appears at the beginning of the contract.
  • Price or rent and its update, as well as the form of payment of the same.
  • Deposit amount and, where applicable, its application to the purchase price if the purchase option is finally exercised.
  • Indemnities in favor of the landlord-owner in case of withdrawal of the rental by the tenant, and after the first 6 months from its entry into force.
  • Obligations regarding the payment of services and provisions, and repercussions to the lessee, during the term of the lease, of taxes and/or fees (Real Estate Tax, Garbage Tax).

Any issues and clauses that may be of interest to the parties about the lease that they agree, provided that they comply with the law.

  • Option to buy:
  • The granting to the optant of the right to decide unilaterally whether or not to buy the property on which they have agreed to rent.
  • The specific period during which the tenant can exercise the right of option to purchase, which may not be longer than the agreed rental period and its forced extensions, although shorter.
  • The specified, concrete price agreed for future acquisition.
  • The payment of an amount in the form of an optional premium (this being understood as if it were a sign of a purchase-sale, and since an exclusive purchasing power is granted to the lessee), and the set of the same: its loss or total or partial refund in the event that the lessee does not exercise the purchasing power.
  • Percentages or installments of the rent to be applied to the agreed purchase price. As well as their progressivity, depending on the timing of the exercise of the purchase option, and whether they will be applicable or not, in the event of any non-compliance during the lease, understanding them as bonuses at the agreed price.
  • Distribution of the expenses and taxes of the future sale, it is the norm for it to be in the following form: all to the account of the buyer, except the Tax on the Increase of the Value of the Territory of Urbanization Nature (Municipal Capital Gain), that will run by the seller.

As with renting, any clauses that may be of interest to the parties.

The link between the rent and the purchase option

It is always advisable to establish whether the purchase option granted, which is not obligatory for the tenant, as the word option itself indicates, will be extinguished if there are breaches, by the tenant, of all obligations contracted through the rental contract, especially those of an economic nature.

If it is agreed that the contract that is granted, of the rent to buy option, can be registered in the Registry of the Property, it will have to be foreseen who bears the expenses that are originated as a consequence of the elevation to public of the contract and later inscription, being that habitually it is agreed that the one who has had the initiative so that the registry entry takes place pays the expenses. 

Matters of interest

The term for exercising the option is forfeiture, so that, if it is not exercised within the agreed term, the right granted to the optant disappears.

Once the option has been exercised in the manner envisaged and agreed by the parties (it is advisable to do so through burofax or notarial deed), it is consummated and the sales contract is automatically perfected, even though neither the property nor the price has been delivered, and the rent is extinguished.

The Supreme Court has established that, once the right of option has been exercised by the lessee within the agreed term, the purchase and sale is perfected, and from that moment the seller may request from the other party the granting of the deed and the payment of the agreed price, so that it is not appropriate in any way to declare the eviction of the lessee for non-payment of rents and the obligation to pay them at a time subsequent to the exercise, in time and form, of the option.

Contracts with the rent to buy option

On countless occasions, the lawyer Carmen Giménez has been able to verify contracts in which it is indicated that, if the purchase option is exercised, the total amount paid for rent will be discounted from the agreed price. The correct thing is a percentage, not the total.

"From my point of view, and because "the common legal sense is the most common of the senses", the contracts that foresee this type of agreements, will be able to be qualified as purchase and sale by installments, with financing without interest or at 0 interest, but in no way should be considered as the rent to buy option, since it must be understood that with the obligations contracted by the owner granting the option -prohibition to dispose of the offered property and maintain the offer that is binding for it, some benefit, no matter how small, must be obtained from this complex legal business.

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