A Brief Introduction About the Rent to Own Contract
What Is a Rent to Own Contract?
A Rent to Own Contract, also known as a Lease Purchase Contract, is an agreement that is entered to provide an option to purchase certain property that is being taken on rent. The seller or lessor has the ownership rights to the property and agrees to give a right to use on rent to the buyer along with an option to purchase the property at any time during the tenure of the agreement.
The buyer is entitled to the use of the property as per the terms and conditions set out in the agreement and can choose to purchase it on meeting the conditions at the cost mentioned therein.
Overall, there are two parts to this agreement. One part is to provide the property on rent, and the other is to provide an option to buy it. It allows the seller to gain a steady income from the property and allows the buyer to use and assess the property and also gives him time to gather the finances to make the purchase.
Who Takes the Rent to Own Contract? – People Involved
Rent to Own Contract is entered between the seller or the owner of the property and its buyer or renter. Unlike rent agreements, this arrangement also provides the buyer with an option to make a purchase during the term of the contract while also allowing them to use the item or property on the payment of a fixed amount periodically.
Purpose of a Rent to Own Contract– Why Do You Need It?
Rent to own agreement is beneficial to both parties for different reasons.
The buyer mainly enters into the agreement for financial reasons. The contract allows them to make small weekly or monthly payments as opposed to a large one-time lump sum amount for the use of the property. They get the time to gather the necessary finances for the purchase and can also use and assess the property prior to the purchase. The seller, on the other hand, gets a regular income from rent rather than the property lying unused. He also gets a reasonable guarantee of a sale at the end of the contract period.
Contents of the Contract – Inclusions
The contract for rent to own must contain the following clauses:
- The names and details of both parties, the buyer, and the seller.
- The definitions of the terminology of the agreement.
- The address and ownership details of the property or material being given on rent.
- The conditions of use of the property, especially in the case of homes for rent to own. The lessor can set out conditions for who can use the property, whether the same can be sublet, the inclusions with the property – furniture, insurance, maintenance, utilities of electricity, water, etc. rules of use of the property and conditions that can lead to the vacancy of the tenant.
- The duration or tenure for which the agreement will remain in effect.
- The amount of rent and the periodicity of payments. A payment schedule may also be included.
- Details of the application of the amount paid where a part or whole of the amount is reserved towards the purchase of the material by the buyer and breakup of the amount.
- Details of any security deposits that may be required to be paid upfront to the seller.
- The option to purchase and the conditions are pursuant to which it can be done. The details of the amount at which the purchase can be made must also be included.
- The rights and obligations of both parties towards each other and the property must be clearly stated.
- The legal clauses regarding the agreement being legally binding, governing laws, effects of violation of any of the clauses of the agreement, dispute resolution measures, etc.
- The causes and effects that can lead to the termination of the contract. This will also include the event of purchase of the property or material as that would lead to the end of the agreement.
How to Draft a Rent to Own Contract?
When drafting the rent to own contract. You should keep the following in mind:
- The type of contract must be carefully chosen. This will depend on the clause of the purchase option. Generally, in the case of materials that are not commonly rented and depreciate over time, such as consumer electronics, appliances, etc. the contract has a mandatory purchase clause at the end of the term. However, for land, the contract would give the tenant an option to make the purchase.
- Since the future purchase price is pre-decided, the duration of the purchase must be fixed. In case the buyer does not exercise the option to buy within the timeline, the contract may be renewed wherein a new price is fixed for an extended period.
- All payments and timelines that form a part of the contract must be clearly stated.
- The rules and regulations of the use of the property or material must be stated in detail. This clause protects the seller from damages to the property by the lessor.
When negotiating the clauses of the rent to own contract, the following should be discussed:
- The rights and obligations of the parties to the property and towards each other.
- The duration of the contract.
- The amount to be paid by the buyer in terms of fees, rent, and deposits.
- The lock-in value at which the future sale will be made.
Benefits & Drawbacks of a Rent to Own Contract
Having a rent to own contract has the following benefits:
- All terms and conditions of the arrangement are highlighted and agreed upon formally.
- In the case of homes – For the seller, there is a steady income in the form of rent for the unsold property, the scope for getting long-term renters who mat convert to purchasers, and the likelihood of getting tenants who would take better care of the property. For the buyer, they get time to make use and assess the suitability of the property for them. They also get the necessary time to improve their credit scores and obtain the finances to purchase the property.
- In the case of other depreciable materials – The sellers get a whole other channel of sales to people who otherwise find the product expensive, and the buyer is able to purchase it by making payments in small installments instead of a large lump sum amount.
Despite these benefits, there are certain drawbacks to having such a contract in place. They are as follows:
- In most cases, the contract merely gives the buyer an option to buy. This does not guarantee a purchase at the termination of the contract.
- In cases where the market price of the property increases, the seller may be obligated to sell it at the lower agreed value as per the contract.
- In case the buyer decides not to make the purchase, any fees, deposits, or other amounts paid towards the same are non-refundable. The buyer loses the amount.
- The rent amount on property or material under such contracts is usually higher than the normal rent.
What Happens in Case of Violation?
In case there is any default from either party, for instance, if there is a delay in the installment payments or if the seller refuses to sell since the market price increased, the contract should provide for remedies. The parties may agree to reach a middle ground on such disputes(1) . In case the issues are not sorted among the parties, the contract is a legally binding document and can be presented in the event of any litigations.
The contract is mainly for customers who require financial assistance for the purchase of expensive property or materials. It gives them time to arrange for the same. At the same time, it also allows the seller to get a steady income from the property. Having such an agreement has its pros and cons. One should consider it only in cases where it is necessary.