Lease-to-own is a viable alternative to consider for those deciding to purchase property today.
Economic difficulties, job insecurity, unemployment and the pandemic have reduced, for many Italians, the financial availability accompanied by the inability to resort to loans or mortgages provided by banking institutions, which is even more accentuated by the rise in mortgage rates that characterize this latest period.
As a result, a number of alternative contractual forms aimed at the purchase of real estate property are gaining popularity, which are characterized by a split in the price to be paid over time that consequently shifts the date of the final deed.
Among these, it is enjoying some success today, in addition to the better-known Rent To Buy, which we will return to soon, the lease-to-own. We emphasize that there would be others, such as the sale with reservation of title; the sale with installment price without waiver of the legal mortgage, or the advance-effect preliminary .
What is a lease with a future sale agreement
This is an atypical contract characterized by a scheme divided into two stages, the first one being the enjoyment of the property to which is added a deferred in time, which concerns the transfer of ownership of the property.
Thus, a covenant of future sale is a lease containing a clause that provides for the transfer of ownership of the property as a result of the payment of rent. It is, in essence, a contractual link between a lease and a preliminary sale agreement. Since it is a contract aimed at transferring ownership of real estate that requires written form and transcription for its validity, it is entered into in the form of either a public deed or otherwise as a notarized private deed.
The preliminary of sale can be of two types:
- unilateral, i.e., involving an obligation to transfer ownership only for the landlord, while the tenant-landlord retains the option to opt out;
- bilateral, which instead binds both parties to the purchase and sale.
Let's try an example of a lease with a future sale agreement. The agreed term is three years plus the option for tacit renewal for two more with a bilateral preliminary. Once the five years have elapsed, the tenant must obligatorily buy the house, draw up the final agreement and pay the price. In the case of a unilateral agreement, however, the same will have the option to opt out of the purchase.
As for the total amount to be paid to finalize the purchase, there are two main ways that you can decide with the seller:
- the payment of the ordinary rent, i.e., that provided on the basis of market value to which a deposit or down payment connected with the preliminary (paid at the signing of the preliminary or also in installments) should be added;
- the payment of an increased royalty consisting partly of a sum to be charged as a rental fee, and the other to be charged as a sales price (itself qualified, in whole or in part, as a down payment).
Very often, the value of the house is still higher than the total amount paid monthly so there will be a need to establish with the other party how to pay the missing portion. This usually involves paying a down payment and a final balance, in addition to the deposit.
Benefits of a lease with a future sale
Wanting to analyze this contractual figure from the point of view of its effects in the subjective sphere of the parties, it can be observed that:
- regarding the owner (seller/landlord), he or she will retain ownership of the leased property until the full stipulated price is paid. Thus, a rental income will be secured against a far-delayed term for the transfer of the asset.
- with regard to the buyer/landlord, he or she will benefit in any case from the rights provided by the regulations of leases and, again in the face of a deferred term for the transfer of ownership, during the rental period he or she is liable only for ordinary maintenance expenses, while direct and local taxes remain the responsibility of the landlord and, in general, benefits from the protections provided by the legal regulations of leases.
It obtains deferred ownership of an asset without immediate payment of the total amount and without taking out a mortgage, thus saving on the related interest.
To protect his rights, in the case of transcription he can oppose the contract to third parties the right to purchase the property, for a maximum duration of three years (validity period of transcription).
What happens in case of default?
Since this is a lease, the main remedy will be eviction for default. It should be borne in mind, however, in such a case, with regard to whether a down payment is added to the rent, except in cases where the additional amount qualifies as a security deposit, it may not be retained by the owner of the property; however, fair compensation is due to him and, of course, compensation for any damage suffered.
Tax aspects of "lease with future sale"
On the other hand, with regard to the tax aspect of this particular atypical contract, the Internal Revenue Service, in its March 4, 2014 response, in order to avoid confusion with the Rent to Buy contractual scheme, clarified that in the case of a bilateral preliminary (with an obligation to the stipulation binding on both parties), concerning an asset subject to VAT, the tax must be paid in full when the preliminary is signed. While if buying as a private individual, the registration tax due in relation to the portion of the rent attributable to consideration for the transfer is applied "on the total amount of the agreed down payments."
We will talk more specifically about the Rent to Buy formula later, follow us on our blog or social channels:
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