Pros and cons for both parties in rent-to-buy
CLIFFE Dekker Hofmeyr details the pros and cons of rent-to-own.
Advantages For tenants/buyers: Many tenants prefer to purchase rather than rent, but do not qualify for loans because of factors such as no credit record, unstable income, lack of proof of income and so on. A rent-to-own agreement gives them the opportunity to acquire the property they are renting at a later stage. The tenant is entitled, but not obliged to, purchase the property at any time during the lease period or just before the expiration thereof.
Because the agreement must specify the purchase price and all other terms with which the owner will sell the property to the tenant, they will have certainty regarding the purchase price and the sale terms and conditions.
The tenant has the advantage of occupying the property for a period before having to elect whether to purchase it. This allows them to decide whether they still want to buy. For landlords/owners: In difficult economic times, when funding is not readily available and financial institutions impose stricter lending criteria, a rent-to-own agreement will ensure the landlord earns rental until the tenant qualifies for a loan.
A tenant who intentionally wishes to conclude such an agreement, as opposed to a standard lease agreement, is more likely to be committed to comply with all obligations set out in the lease agreement.
Disadvantages For tenants/buyers: The agreement is more complex than a standard lease agreement.
The landlord might want to charge for granting the option as he is prevented from selling the property to another purchaser during the lease period. This may affect the rent or additional consideration may be payable.
The lease agreement may contain onerous maintenance provisions and obligations, and tenants should make sure they understand the terms and conditions. For landlords/owners: The landlord may not accept any offer made by a third party to purchase the property until the option period – normally the lease period – has expired.
As the purchase price must be contained in the “rent-to-own” agreement, the landlord will be bound to such price and may not renegotiate it at a later stage.
Although the agreement may contain an escalation clause in terms of which the purchase price escalates, it is not always easy to predict market conditions and the escalation may not be market-related at the time the option is exercised.