Business & Property

Beware of ‘Rent to Buy’ Property Schemes

Many tenants desperate to purchase a home are getting caught in a ‘rent to buy’ trap, writes TGB's Commercial Law Team.

Many tenants desperate to purchase a home are getting caught in a ‘rent to buy’ trap. 

How do ‘rent to buy’ arrangements work in South Australia? 

‘Rent to Buy’ arrangements often come about when a tenant is renting a property and doesn’t have the savings history to be able to afford a home loan. There are plenty of these schemes out there and they are advertised heavily.

The opportunity is offered to enter into an ‘option to purchase’ agreement. More often than not, the hopeful buyer:

• Signs a lengthy term, usually around five years

• Pays up to three times above the market rent per week, with the option to purchase the property at a price which has been agreed to from the outset

• The purchase price is also often well above the market rate (it is nearly impossible to predict what the value of a home will be in five years)

On the promise of home ownership the individual pays an enormous amount of rent, with the extra amount to be used to reduce the purchase price of the property when the agreement comes to an end.

But in the fine print there is an option fee payable, and that might be, for example, $50,000 and that payment is deducted against the purchase price. Interest may have also been incorporated into those payments.

So years down the track when thousands of dollars has been paid in rent, if the individual chooses not to exercise that option, the money is lost. And if they do choose to go ahead with the purchase, the price is often not reduced against the rent payment after the option fee and interest has been accounted for. The buyer is taken for a ride.

Importantly, throughout the period of this agreement, the property is always registered in the landlord’s name. So if the owner goes broke, the prospective buyer’s large rent payments are lost along with any equity in the property.

So, the true nature of these ‘rent to buy’ arrangements are unfair.

Are ‘rent to buy’ schemes illegal?

The Land and Business (Sale and Conveyancing) Act specifically prohibits ‘rent to buy’ agreements. No lawyer should draft them. I’ve been asked in the past to do so and refused.

The legal consequences of these agreements are:

• If the tenant doesn’t take up to option to buy at the end, any money paid over and above the market rent must be re-paid by the landlord.

• If there is an ambiguity between the rental agreement and the option to purchase agreement, then those payments are considered as one and everything paid by the tenant should be paid back.

Of course, some lawyers and landlords look for loopholes and draft around the legislation. In particular, Section 6 of the Land and Business (Sale and Conveyancing) Act says, A contract for sale of land or a business that provides for the payment of part of the purchase price of the landord business, except a deposit, before the date of settlement, is void. Often they try to turn the option agreement into a deposit of the purchase price, and attempt to get away with it.

But further on in the prohibition it says, A contract under which a person has a right or an obligation to purchase, and an obligation to pay rent for anything over a six month period, is voidable at any time at the option of that person. And if they do take up that option to void, then they’re entitled to payment for anything over and above market rent for that period.

Case study

We have a client who has paid nearly $100,000 in one of these arrangements. She was nearing the end of her five year term and wanted to negotiate an extension on the option to buy. It was then that we looked at the papers and noted that she in fact didn’t have to exercise the option and was entitled to receive that money back. In this circumstance, the landlord was applying interest at 9.5% over the five year period. And despite the enormous amount of money she had already paid, the landlord was still maintaining that the purchase price would remain the same.

To the landlord’s credit they have been reasonable, and we believe they genuinely thought they were doing the right thing, and were perhaps caught up in a “get rich quick” scheme themselves. Our client has been able to have her money paid back.

I am in a ‘rent to buy’ agreement. What should I do?

It is important to seek legal advice about the current deal, and if you are ever presented with an offer to sign up to such an agreement, you should also seek advice.

People who are unable to get finance or have a poor savings history often see ‘rent to buy’ as a great opportunity, not realising the dangers. There are many of these schemes out there in South Australia, and beyond.

For further information or legal assistance contact your nearest TGB office.