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Rent with Option To Buy Contract (RTB) –  Is this a solution to sell to expats after COVID-19?

Rent with Option To Buy Contract (RTB) –  Is this a solution to sell to expats after COVID-19? 940 788 TLA

In previous articles we were talking about the perspective that comes after passing the trance of this pandemic and the confinement in our homes, throughout Europe, and in the rest of the world.

Regarding the real estate residential market, that is, the purchase and sale of first/permanent residence, we were talking about the “latent demand” that exists in Spain with respect to those foreigners from other countries, who wish to come to Spain to live on permanent basis.

A fact that has been constant for the last two decades is the arrival of foreigners who have chosen Spain as their permanent place of residence, and who we normally identify as “expatriates” or “expats”. The volume and number of expatriates who have chosen Spain as their place of residence in these last two decades has always been constant, and has even increased in periods of crisis, or post-crisis, such as those experienced in Spain in both 2008, and 2011.

With more than 15 years in the real estate sector, our company has verified that, just in the periods immediately after crisis, the number of expatriates interested in acquiring properties in Spain has increased.

And, as a result of our experience, we have observed that the first acquisitions that have been concluded in those moments have been especially complicated due to the context of instability and uncertainty, both from the point of view of financing, and the possible evolution of housing market.

That is to say, the buyer who ventures to invest in Spain in the purchase of a permanent residence, is immersed in the uncertainty caused by thinking if we are already in the final phase of the crisis, or if there is still a way down. (“Will I be buying at a good price?”).

However, in these types of buyers, the interest in the purchase is clear. They are also clear about the moment. They want to buy now. They know that it is time, but they are not clear whether the price, and the conditions of the sale, will be the most appropriate until the post-crisis climate of insecurity disappears or dissipates.

At this point the rental instrument with option to purchase is proposed as a solution.

Rent with option to buy (RTB) What is it about?

Rent with an option to buy, is a contract in which the buyer wants to acquire a property for living permanently, and wants to occupy it and use it immediately, but wants to postpone the final decision of purchase to a later time.

And, in addition, buyer wishes that, during the time of use of the property, the seller cannot offer the property on the market, so reserving  the exclusively option of purchase for the buyer, for the whole duration of the contract. Here is the most important difference with this contract and a “normal rent contract” where the landlord can sell the property to someone else, even while the existence of a rental agreement.

Therefore, in the RTB contract there are two main concepts involved:

– It is a Purchase Contract, with “option to buy”.

That is, the buyer wants to buy the house, but demands to have the house at his disposal until he confirms his decision. In other words, he wants the purchase option to be for his exclusivity. So, reciprocally with the exclusivity right of the purchase option on the property, the buyer pays an amount to the seller to compensate him for the time the house is reserved to the buyer, and out of the sale market.

Once the term or condition agreed in the contract has been met, arrives the moment in which the buyer must decide to execute the right to buy the property. In this moment, there are two scenarios:

  • The buyer can exercise his right to purchase, and, in that case, complete the purchase. Thus, the buyer would pay the rest of the price to the seller, and the sale transaction would be completed.
  • The buyer wishes to withdraw from the purchase, therefore, he assumes the loss of the amount he paid as per the “option to buy” , leaving this amount to the account of the seller, who makes it to his own in consideration of the time he has the house reserved for the buyer.

– It’s a rental agreement.

The buyer wants to occupy the house immediately, but, as explained above, he prefers to leave the formalization and final purchase decision for later. With which, it is proposed to assume the figure of “lessee” or “tenant”, until he decides to exercise, or to desist, from the purchase option during the time stipulated in the contract.

In this way, the buyer, now the lessee/tenant, agrees on rental conditions, and on the payment of rent, with the seller, now the landlord/lessor, during the term of the contract.

And in the same way that with respect to the exercise of the purchase option, once the maximum term to exercise it has come, the buyer or lessee/tenant has several options:

  • To execute he purchase option and complete the sale. In this case, the rental transaction is cancelled, now converted into a sale.
  • Buyer does bot exercise the purchase option. In this case, the rental agreement is also annulled. Obviously, in case the two parties agree, the rental contract can be extended, or a new rental agreement can be created, and then the contract will be only for rent.

Important questions:

1.- What happens to the amount paid in the purchase option?

Is it considered as part of the price? In other words, can the option be discounted from the final price to pay for the property?

The answer is very simple. It will be what both parties agree. That is, the amount paid for the option will be deducted from the price if both parties agree . In this case, the amount paid for the purchase option is discounted from the rest of the price to pay for the property.

This is the most widely used option in the market.

However, the owner may also require that the amount paid for the purchase option is not discounted from the price to pay for the property. That is, this amount simply covers the time that the property has been out of the market, and that it does not represent part of the price. With which, in this case, the payment of the purchase option will not be discounted from the price to be paid to the owner for the sale.

Obviously, this is a much more damaging option for the buyer, and it is not as widely used in practice.

Whatever any of the options should be expressly included in the contract in order to clarify the destiny of the option payment.

2.- What happens to the amounts paid for the rent?

Are they deducted from the final price to pay for the sale?

The answer is the same as above. That is, it will be the parties who will have to agree, when agreeing to the conditions of the contract, if the rent is be discounted from the final price or not, in case of purchase decision is confirmed.

3.-  Agents commissions/fees. When are they paid?

Here, again, there will be what is agreed between the parties and the real estate agency.

However, from a legal point of view, unless there is an agreement to the contrary by the parties, we understand that the agent commission/fees must be paid at the time of signing the purchase option contract. The reason of this is that, this contract, involves reaching a purchase agreement between buyer and seller. And this, although the consummation of said contract is delayed until a later date.

As we say, when the RTB contract is signed, the «agreement» between the parties has been reached, and this has been done through the intervention of the agent. This is why the agent’s commission/fees must be paid when the RTB is formalised.

It can be considered unfair to condition the payment of the commission of the agent, to the effective purchase decision, which, will remain in the hands of the buyer, and out the hands/control of the agent.

4.- How is the RTB formalized?

It is normally a private contract, which does not need to be notarized nor to pay taxes.

The only taxes paid are by the owner, who will have to declare in tax returns, will be the income generated from receiving the purchase option, and from the monthly rent received from the tenant.

For more security of the tenant, the contract can be made on a notary and registered in the property registry, and in that case it would pay the AJD (Stamp Duty) – «Actos Jurídicos Documentados», which can be between 1% and 2%, according to the autonomous communities or regions. But this option is usually ruled out for the extra costs involved.

Therefore, the most common practice is to prepare a private contract between the parties without having to go through a notary. Although, as we will see, it is essential that the contract be drawn up by a specialist lawyer.

Once the maximum term to exercise the purchase option has arrived, and in the event that the buyer exercises said option, the expenses and taxes derived from the transaction will be the normal ones of a sale, that is to say the ITP (“Property Transfer Tax ”), Notary fees, registration, lawyers, etc.

5.-  What are the most common problems that usually arise in RTB transactions?

Once the RTB contract is signed, there are normally two types of conflicts that are commonly repeated in this type of transactions:

– Disputes regarding the physical state of the property. In other words, as with the rest of the rental contracts, many times, the tenant, when he takes possession of the house, encounters different construction defects or problems, which can lead to a conflict with the owner.

Therefore, it will be necessary for both parties to detail in the contract as much as possible the conditions in which the property is located, to avoid this type of conflicts during the duration of the contract.

– Legal problems of the property. Although, unlike the physical problems in which the property can be found, which can be easily avoided with a proper inspection of the property prior to the occupation of the property, the same does not occur in practice with eventual legal problems which may affect the property.

As we have reported in this article, redacting a RTB contract may be seem to be more or less easy and simple. That is, it can be done privately, without going through the notary, so it can give the impression that it is an easy contract: a rental contract, simply by introducing a purchase option.

In this way, in many occasions, in order to save expenses, parties are brought to transactions where these type of contracts are redacted by non-qualified professionals , or even non-specialized lawyers. The reason of this is because, apparently, this is an “easy contract” to redact. So, therefore, not dedicating the necessary time, and consideration that this transaction entails.

As we say, this is not a “special” rental contract… this is a purchase/sale contract with special conditions.

Therefore, in many, many cases, we find that buyers have entered into a contractual relationship with the owner, have paid a significant sum of money as the purchase option, have lived in the property for a time as tenants, and, when the time comes to exercise the purchase option, before going to sign the notarial acts, or, unfortunately, even later, they detect that there are legal problems affecting the property, such as problems in the installation of electricity, water, urban problems, urban infractions, penalties , problems when renewing the habitability certificate, or, even worse, that there is no habitability certificate, non-compliance with urban regulations, extensions or modifications of buildings carried out without a license or building permit, etc.

Discovering this type of legal problem after signing a RTB is very dangerous.

Therefore, as lawyers, we recommend that the legal study of the property must be carried out during the contract formalization process, and not afterwards.

Legal searches on the property must be done during the formalisation of the RTB contract, and the contract must be conditioned to obtain the necessary legal information to confirm that the property fulfils with the legal and construction normative.

Therefore, when you are involved in a RTB contract as a buyer, request the contract:

– To be written by a lawyer specializing in property law. That is, who has mastered the laws and regulations regarding the drafting of contracts, and the derived contract obligations and rights of the parties.

This will help you to prepare a contract with the maximum guarantees.

– To be written by a lawyer who is also a specialist in Construction and urban planning law.

Not all Property lawyers are specialists in construction law. Being an expert in construction law is essential to be able to investigate all the essential legal aspects of property, borders, construction licenses and permits, the history of construction (that is, how it has been built, how it has been reformed or expanded) ,  if it complies with all the local urban regulations, if there are urban charges to pay in the urbanization, or if the plot must be reduced to give part of it for eventual works in the urbanization, etc.

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