Rent-to-Buy Schemes

Conveyancing 04/06/2009

The Conveyancing Committee has received several enquiries seeking standard precedents for the ‘rent-to-buy’ scheme from:

  • Solicitors acting for prospective tenants, 
  • Builders’ solicitors,
  • Solicitors advising banks/ mortgagees.

The committee has also been asked to advise generally on matters such as the advisability of cooperating with such schemes and on potential pitfalls, including (but not limited to):

  • What is to happen regarding the rental payments/potential deposit monies in the event of insolvency or winding-up of the builder at any stage of the transaction?
  • What is to happen regarding the rental payments/potential deposit monies in the event of charges or judgment mortgages being registered against the property between the time of any tenancy/option agreement, and whether any option agreement should be registered?
  • Whether any deposit protection, such as that afforded by HomeBond or other similar schemes, extends to any of these ‘rent-to-buy’ scenarios and, if so, whether the usual time limitations inherent in those deposit protection schemes also applies,
  • Whether and/or when investigation of title should take place and, if not at the outset/ option stage, whether the option agreement should be made subject to title, and so on,
  • Whether or not a house or apartment rented by a tenant for a period of time could later be sold to that person, or indeed to any other party, as a new property for stamp-duty purposes,
  • Landlord and tenant issues for the builder – including whether the tenant would acquire statutory rights to a new tenancy,
  • Tax implications for a builder, including implications in terms of VAT (clawback possibilities),
  • Whether, if the development was mortgaged, the bank’s consent, including consent to any option agreement, would be necessary,
  • Implications for banks for possession of a mortgaged property if they consent to or join in any option agreement under such schemes.

The committee has confirmed that the above questions involve matters of law and the interpretation of statute law and case law, and they are not matters of conveyancing practice and procedure. The committee is precluded from giving advice on matters of law and from interpreting legislation and legal documentation.

Contrary to what many solicitors appear to believe:

  • There is no statutory rent-to-buy scheme,
  • There is no one standard scheme in operation, and
  • There does not appear to be a consensus in the profession, or indeed in the auctioneering profession, on what ‘rent-to-buy’ means.

The committee has received anecdotal evidence of various types of proposed schemes. Some of the proposed schemes seem to envisage tenancy agreements with an option for the tenant to purchase in two or three years’ time at a price that is set now. Rent is payable in the interim – but there is no deposit as such. The sum paid as rent over the two or three years is set off against the purchase price (either in whole or in part) if the option to purchase is exercised. There is no obligation on the purchaser to purchase/exercise the option.

Other proposed schemes do not appear to contain any element of tenancy whatever, with the only documentation offered to the ‘tenant’ being the standard contract for sale and building agreement – albeit with a long closing date and a facility for the ‘purchaser/tenant’ to pay the deposit (in some proposals called ‘rent’) direct to the builder over the course of two years.

It appeared to the committee that little thought had been given to what would happen to the ‘deposit/ rent’ in the event of the builder going into liquidation before completion, etc. Such proposed schemes would also typically have no provision allowing the purchaser to walk away at the end of the two or three-year period if he/she simply did not want to buy the property at that time, and it appears that the builder in many of these proposed schemes intends to reserve all the usual contractual rights to sue for specific performance and damages for breach of contract, etc.

Other proposed schemes purported to provide that, rather than have a purchaser/tenant sign a tenancy agreement and exercise an option to purchase after a set period of time, there would be a requirement that full contract documents would be executed, and the purchaser/tenant could walk away or ‘opt-out’ of the agreement only if the market value of the property dropped between the time of the initial agreement and the time of closing, and it did not appear that there were provisions made in those cases for how market value would be determined at either time.

Whether some of such proposed schemes could be termed ‘rent-to-buy’ schemes is open to question.

While there may be a certain appetite among developers, banks, and prospective purchasers for such rent-to-buy schemes, the committee is of the view that it is not within its remit or function to seek to give validity to any particular scheme or concept.

The committee accepts that its function includes giving consideration to the provision of precedent documentation in order to assist the profession in appropriate circumstances. Having considered the matter, the committee unanimously agreed that it should not be involved in drafting precedent scheme documentation to cater for these types of schemes. It appeared to the committee that there are so many variations of the rent-to-buy theme that it would not be possible to draft a set of documentation that would suit all cases.

However, the committee urges practitioners to be alert to the need to take all matters into consideration, depending on who they are asked to advise, in relation to such schemes. The committee urges practitioners to ensure that all documentation is carefully examined so that the exact nature of the transaction is ascertained and the client fully advised.