Understanding “rent-to-own” deals

Due to the difficulty in accessing credit alongside the current economic and employment situation in Mallorca, Menorca & Ibiza, many people who were thinking of buying a property end up living on rent. For many of them, renting with an option to buy is an increasingly common solution, since it allows them to invest the money destined to rent in a possible purchase. But what exactly is it and how does it work?

How do “rent-to-own” deals work in Mallorca?

Renting with the right to buy, or “rent-to-own” situations are dual contracts made up of two sub-contracts: one for rent and one for sale. This allows the tenant to live in the rented property for a set period of time. At the end of the period, they will have the right to buy the property for an agreed price, from which the rent paid up to that point will be discounted, totally or partially.

According to the Spanish Supreme Court, this is “a pre-contract – which in principle is unilateral, by virtue of which one party grants the other party the exclusive power to decide whether or not to conclude the main sales contract, which must be concluded within a certain period and under certain conditions, and may also be accompanied by the payment of a premium by the bidder”. Therefore it is a type of contract that can be beneficial for both parties: for the tenant because he can live on rent while investing in a possible purchase; and for the landlord because whilst the tenant does not buy, he has his home rented with the premium as insurance.

This type of contractual agreement does not necessarily mean a higher or lower rental fee than in a normal contract, but it does imply a higher initial outlay by having to provide a premium for the option to purchase, which is usually much higher than the amount provided in a deposit. In addition, in the case of the premium and contrary to what happens with the deposits, if the tenant does not decide to purchase the property they will lose all of it. This is why it is very important to make sure that you will be able to pay the purchase price or take out a loan at the end of the agreement. Likewise, if you are sure that this is the most suitable option, before making or signing the contract you must check that the property is free of any debts or infractions.

How should a “rent-to-own” contract look?

Renting with an option to buy is an atypical contract, not contemplated by law and not expressly regulated in the spanish Civil Code, although it is accepted and recognised in the Mortgage Regulations and the Urban Leasing Law (LAU). For this reason, it is very important that all the conditions are very well specified in the contract.

For this to be valid according to the Supreme Court, it is obligatory that at least two essential conditions of the sale appear in it: the objective of the contract and the price. This means that the decision to purchase the property is transferred to the tenant after the specified number of years of rent and the sales price stipulated for the residence at the time the contract is signed, in addition to the amount of the rent and the percentage to be deducted from the rental income in the event that the sale and purchase takes place. If an initial premium is provided, which is the usual practice, the agreed amount of this must also appear.

As it is a dual contract, it is desirable that all the conditions relating to the lease and purchase are clearly reflected in it. The following details should be included in both the rental and sale contract:

Rental Contract

  • Length of time the tenant can stay in the property
  • Period during which the tenant can exercise his right to purchase
  • Amount of rent due monthly
  • Who pays for the community fees or possible reform

Purchase Contract

  • The landlords desire to sell the property
  • The agreed sale price
  • Percentage (fixed or variable) of the rent quotas to be discounted from the sale price
  • Amount of the initial premium, usually fixed according to a percentage of the agreed sale price

Conditions of a “rent-to-own” contract

  • At the drafting of the contract, it is not essential to set an initial premium for the right to buy. However, for the owner it is advisable, as it is a way of ensuring that the tenant is interested in purchasing the property. It must be clear that the premium and the quotas invested in the rent will be lost if the tenant does not exercise the right to purchase.
  • The tenant has the right to remain in the property for the duration of the rental contract, regardless of the period established for exercising the right to purchase, since this subcontract is regulated by the LAU.
  • The tenant can extend, if the owner agrees, the rental contract, but, in that case, the option to buy will expire because they are two different contracts.
  • The owner has the obligation to maintain the contract and not to rent or sell the apartment to third parties during the time of the contract.
  • The tenant has the exclusive right to purchase the property within the period established in the contract.
  • The purchase of the home can take place long before the deadline. In fact, it is common for the tenant to decide to buy before two years have passed, which is beneficial for both parties.
  • The purchase price cannot be changed by either the owner or the tenant. The price of the rent, however, can vary.
  • If the tenant is more than two months late in paying the rent, he or she will lose the option to buy and, therefore, the premium paid at the beginning of the contract.
  • The contract can be registered in the property register to be enforceable against third parties, as long as both parties agree and comply with the basic requirements stated above.
  • As these contracts are subject to Transfer Tax, they can give rise to different tax situations:
  • If only the term and the price of the property are specified, during the rental contract, the tenant may deduct the rent and the owner must declare what he has received. In addition, when the sale takes place, the owner will have to declare this capital gain and, if applicable, the buyer will have to deduct it.
  • If the tenant pays the owner the premium for the right of option, the owner must declare that gain, although the former cannot deduct it.
  • Be that as it may, it is important to bear in mind that the price of the purchase option and the part of the rent that is discounted from the final price when the purchase option is exercised, may be deducted in the income tax as a regular purchase.

If you require any assistance or legal counsel concerning properties, purchases and sales on the islands of Mallorca, Menorca and Ibiza, please contact us at your convenience at info@mallorcasolicitors.co.uk or by phone on the numbers listed on our contact page.



You May Also Like