The Thursday Tidbit
Rent-to-own purchase agreements offer buyers, who do not currently qualify for a standard mortgage, with an opportunity to purchase a property in the future. These types of agreements consist of 2 main components: a standard lease agreement and an option to purchase.
The Standard Lease Agreement
In a rent-to-own scenario, title (i.e. ownership) to the property remains with the landlord (i.e. the seller) until the tenant (i.e. the buyer) exercises their option to purchase. The tenant enters into a rental/lease agreement with the landlord to reside within the property subject to various terms and conditions – such as the duration of the lease period, rent owing, and the responsibilities of each party.
The term of the lease is typically 1-3 years, as most Canadians are able to secure financing within that period of time. Remember, the duration of the lease is a benefit to the buyer as it provides them with time to save up money to make a larger down payment against the purchase of the home and resolve any prior credit issues on their account.
Furthermore, the amount of rent owed to the landlord, in a rent-to-own scenario, is usually higher than payments typically made to a landlord in a standard lease agreement. Typically, a portion (ex: 10%) of the monthly rent payment is credited to the purchaser upon closing the real estate transaction. As such, the tenant builds up equity in the property throughout the duration of the lease agreement.
The tenant is expected to comply with all their obligations within the standard lease agreement. Failure to comply can result in the forfeiture of their option to purchase, the option fee and the percentage of monthly rent payments allocated towards the purchase of the property.
The Option to Purchase
The option to purchase enables the tenant with the right (i.e. option) to purchase the property from the landlord within a specified period of time. To obtain the option to purchase, the tenant pays an “option fee”. Failure to exercise the option does not entitle the tenant to a refund of the option fee or any of the rent paid during the term of the standard lease agreement.
Within the rent-to-own purchase agreement, the option to purchase must: 1) state the option fee; 2) the duration of the option period; 3) outline the future purchase price of the property upon execution of the option; and 4) comply with the laws of the jurisdiction in which the agreement was created.
Rent-to-own purchase agreements are great for tenants who wish to purchase a property but, due to their bad credit history or an inability to make a high enough down payment, do not qualify for a standard mortgage. These types of arrangements allow buyers to build up equity within a home while providing them with the option to walk away from the property should their financial circumstances change in the future. Conversely, rent-to-own purchase agreements enable landlords to find suitable buyers for their property.
Currently, the Alberta Real Estate Association does not offer a rent-to-own agreement template to real estate professionals and lay individuals. As such, if a real estate agent represents a seller or buyer who is interested in pursuing a rent-to-own agreement with the other party, the agent should recommend their client seek legal counsel to ensure the agreement is drafted appropriately and in line with their intentions.
If you have any questions concerning rent-to-own agreements, please don’t hesitate to contact Khemka Law or counsel of your choosing. If there’s a topic you’d like us to cover, please let us know! We are always here to assist you. Thank you for taking time to read this Thursday Tidbit.
Pranav Khemka, Barrister & Solicitor
T: (403) 457-9577 | F: (403) 457-9578
Suite 202, 5403 Crowchild Trail NW, Calgary, AB T3B 4Z1 | T: (403) 457-9577 | F: (403) 457-9578