Rent-to-buy agreements

The reality of the current South African economic climate is such that a considerably large number of bond applicants are unsuccessful, while sellers often experience difficulties in selling their properties at a desirable price. The rent-to-buy option is one that addresses both the buyer and seller’s concerns.

February 4, 2018

The rent-to-buy process

The seller (the landlord) and the potential buyer (the tenant) agree to an arrangement whereby the purchaser/tenant pays a deposit to the seller/landlord, and both parties sign a lease agreement for a specified term at the end of which, the tenant will be able to elect whether or not to purchase. The agreement of lease will incorporate an agreement of sale setting out the terms thereof or an Offer to Purchase (OTP) can be attached to the lease. This OTP will then have a condition that it will only come into effect once the option to buy has been exercised by the tenant. The lease can also simply be a precursor to the sale (i.e. the tenant will not have the right of election at the end of the lease and the OTP will simply come into effect subject to the usual terms and conditions such as bond finance).

There are many advantages to this type of arrangement. The purchaser is given the opportunity to fully experience the property and surrounding area before committing to a purchase, and the seller has a greater assurance that the tenant will maintain the property to a high standard as he or she would be treating it as if it were their own because of their financial commitment.

Requirements of a rent-to-buy agreement

The most important requirement is to have an agreement in place that specifies the duration of the lease, after which the tenant may opt to continue to buy the property. Should the tenant wish to buy the property during the lease, the agreement should specify at what point he or she will be eligible to buy.

The tenant must also be able to show that he or she is financially able to buy, either in cash or by way of loan finance. If a mortgage bond is required by the buyer to obtain the necessary finance, an approval in principle should be obtained from a financial institution for an individual to be an eligible buyer.

In addition, it is important that the rent-to-buy agreement include all the conditions to which the parties have agreed. This will include the purchase price and the monthly payments, as well as the percentage of the purchase price to be paid as a deposit in order to secure the rent-to-buy option (if applicable). The parties may agree that the prospective buyer’s total rental costs will be subtracted from the purchase price should they go ahead with the purchase at the end of the lease.

Furthermore, the agreement must include a specified lease term, and the responsibilities to be fulfilled by the prospective buyer, such as paying rates or levies which are typically the responsibility of the owner.

Rent to buy property – how it works, key requirements and benefits:

  • The tenant must be financially able to buy
  • The tenant may be required to pay a deposit
  • Both tenant and landlord must sign a lease agreement that specifies the terms of the agreement including the lease term
  • The rent-to-buy agreement must stipulate all the conditions agreed upon between both parties
  • At the end of the lease term, the tenant will be able to decide whether or not to purchase the property
  • An OTP (Offer to Purchase) can be attached to the lease
  • For buyers, it eliminates the concern of unsuccessful bond applications
  • For the seller, it increased the peace of mind knowing that the tenant is more likely to take good care of the property

Causes for dispute

Although the rent-to-buy option often ensures that the tenant/buyer maintains the property efficiently because of his or her investment, occasionally this is not the case. This might lead to disputes regarding which party is to finance the cost of repairs and therefore it is wise to ensure that the lease agreement provides for such instances.

Another potential cause for a dispute is that the seller might take the property off the market in the belief that a buyer has been found and the bond approved, only to find that by the time the lease agreement comes to an end, the buyer no longer qualifies for the bond and the seller loses the income that he would have been receiving from the property.

Although the rent-to-own option is often a win-win situation for both buyer and seller, it is recommended that extensive research is done before signing the contract in order to compare the pros and cons.

Written by Wessel de Kock

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