Pros and cons for both par­ties in rent-to-buy

Weekend Argus (Saturday Edition) - - PROPERTY -

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.

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