Rent-to-buy is a contractual tool that allows for the drawing up of a rental contract that can be transformed into purchase. This option provides for the immediate use of the property to be purchased subsequently, within the period set by the parties at a price that is agreed upon and frozen at the moment the contract is signed.
On paper, it is an interesting instrument, but in practice, the regulations contained in the “Sblocca Italia” (Unlock Italy) decree (Decree-Law 133/2014 converted into Law164/2014) introduce a number of complications, both technical and fiscal, which make its application difficult.
The purpose of this article is to offer a layman’s guide to understanding the current regulatory and legal status in order to
- aid in understanding this instrument; and
- highlight some of its complexities.
Rent-to-Buy: How it works
From its definition, it is clear that purchasing is not mandatory. In fact, it is only an option tied to the rental.
The contract format is two-part:
- a rental contract; and
- a preliminary agreement of future sale within a set time period, generally 3-5 years, but safeguarded by law up to 10 years.
Theoretically, it is a very interesting option for the potential buyer, but which implies a price to be paid: the monthly amount due is, in fact, higher than a normal rental fee.
This is because a part of the monthly fee is the rent and the other an advance on the final price of the property or, more precisely, a down payment on the future purchase. In addition, it should be considered that the definition of the rental fee (and down payment) must be set to provide a suitable indemnity to the seller in the event the purchase does not take place.
The advantages of Rent-to-Buy
Rent-to-buy is a way to purchase gradually. The advantage for the lessee is to have a property available immediately without having to arrange financing, and to be able to pay over time while delaying for a number of years the most suitable financial instrument. On the other side, the owner, especially if a builder, avoids having the property empty for an indefinite period of time while awaiting its sale.
In actuality, there are many reasons why a rent-to-buy contract formula could be interesting for the purchase (and sale) of a property. Here is a summary of the main reasons:
For the Lessee
- It provides for payment over time and find the financing method most appropriate to one’s economic situation without being rushed. Because at the time of purchase a part of the total price will already have been paid during the rental period, it could be easier to satisfy financing requirements;
- it avoids the need to pay taxes immediately, such as IMU (property ownership tax), which, by law, are the responsibility of the owner and not the tenant (but who must pay registration taxes in the case of a purchase agreement);
- if the owner is a construction company that has gone bankrupt, the lessee does not lose the right to the house because the contract was entered in public registers;
- because it provides for the purchase of the property, the rent-to-buy contract can be entered in public registers, thus protecting the lessee from the sale of the property to a third party.
For the Owner
- If the owner is a construction company, the property can be occupied immediately, with the advantage of being able to amortize the costs of the property it built, including construction mortgage installments;
- the owner may include in the rent-to-buy contract specific clauses designed to safeguard against the lessee’s failure to fulfill the agreement if the latter decides not to purchase the property;
- The rent-to-buy contract can be drawn up freely by the parties, in conformity with art. 23 of Italian law no. 133/2014 (and norms contained in the Italian Civil Code). For example, safeguarding the owner: “The contract shall be terminated in the event of the failure to pay, including non-consecutively, a minimum number of rental fees, to be set by the parties, of not less than one-twentieth of their total number.”
For both parties
- The parties can set independently the rental fee limits, the period within which the purchase must be decided, and the amounts to be paid as a down payment, but unlike the preliminary agreement for immediate purchase which is valid for three years, the rent-to-buy contract has a validity of ten years.
Additional observations
As can be seen from the information above, rent-to-buy is not a method of installment payment because ownership of the property is not transferred immediately. It is, however, a method of gradual purchase in which, until the closing, the ownership of the property remains with the seller, and this aspect is a major guarantee.
Rent-to-buy can be stipulated for any property, not just residential. It is a formula that may be used for purchasing office property, a warehouse or a garage, as well as other types of real estate.
Some advice for buyers: to avoid problems, always check—when drawing up the contract—that there is no explicit obligation to purchase the property at the end of the rental period. In this case, the rent-to-buy terms do not apply. Once the rental period has terminated, if the lessee does not intend definitively purchasing the property, he or she can always agree with the lessor to continue the rental contract, or leave the property and begin looking for other real estate offerings.
Why rent-to-buy has not taken off in Italy
Many articles have been written by experts in this area (journalists, professionals and agencies) who have described the advantages of “rent-to-buy” contracts to boost the real estate market. However, in Italy, it is still rarely used.
The reasons are due primarily to two factors:
- complexity in its management due to the law which governs this particular type of contract and
- tax obligations.
In terms of management, the monthly fee requires double bookkeeping by the owner because the payments are of different types.
On a fiscal level, lessees/future buyers must differentiate the duty, tax and VAT schemes on the basis of their personal situation and in terms of the type of seller. This entails a level of complexity that implies the involvement of accounting and tax specialists, thus adding to the costs of the operation.
In this regard, in terms of the fiscal aspects, the Internal Revenue Agency published memo 4/E dated February 19, 2015 which includes juridical/fiscal clarifications regarding a number of cases.
Despite, the complexities remain and are an impediment. These are well-described in a guide to Rent-to-Buy published on the website of the Consiglio Nazionale del Notariato (Italian Council of Notaries). After having examined the pros and cons for both parties involved, the guide provides a number of alternative contractual forms:
- rental with agreement for future sale;
- sale with retention of title;
- sale with payment in installments with registry of legal mortgages;
- preliminary agreement with advance application.
Sources and for further information
- Internal Revenue Agency, Circolare 4/E del 19 febbraio 2015 (Memo 4/E dated February 19, 2015)
- it, Il rent to buy e altri modi per comprare casa (Guida) [Rent-to-buy and other ways to buy a home (Guide)]
- Altalex, Luci ed ombre del ''rent to buy'' italiano (Pros and cons of “rent-to-buy” in Italy)
- Università degli Studi Di Napoli Federico II, doctoral dissertation, Luci ed ombre del Rent To Buy (pdf) (Pros and cons of Rent-to-Buy)
- Federico Tassinari, notary, Le “nuove compravendite”: dal rent to buy al buy to rent (“New sales”: from rent-to-buy to buy-to-rent)
