Structuring a "Rent to Buy" Scheme (December 2009)

"Rent to Buy" allow purchasers to sample the house which they propose to buy, before actually buying the house. The schemes should be structured carefully, to ensure that the legal issues concerning both the developers and purchasers are adequately addressed before entering the arrangement.

There are a number of variations on the rent to buy scheme in operation, but the most common is the scheme whereby the developer will grant an option to the purchaser to buy the unit at a specific price within a specific timeframe (generally 2-3 years). The developer and the purchaser also enter into a letting arrangement.

An important element from the purchaser’s perspective is that it is an option to purchase, as opposed to a legal obligation to actually purchase the unit. It is then for the purchaser to decide whether or not to actually exercise the option and to buy the property in the 2-3 year period. There are a number of schemes in operation in which the purchaser would be obliged to buy the property at the price agreed on entering the arrangement, with deferred payments, but these appear to be fraught with difficulty for both the developer and the purchaser.

The rights granted to tenants pursuant to the Residential Tenancies Act, 2004 would apply to the letting. These rights are quite comprehensive and include the right to have the tenancy registered with the Private Residential Tenancies Board.

The letting agreement will be liable to stamp duty if the annual rent exceeds €19,050.  This stamp duty would be at the rate of 1% of the annual rent and will be payable by the tenant.  If the rent is less than €19,050, then no stamp duty is payable.  An option agreement is stampable based on the consideration paid or its market value, which is usually nil in the "rent to buy" schemes. 

The developer will need to consider the V.A.T. implications of operating the scheme and the recent guidance note issued by Revenue Commissioners should be reviewed in detail.

On the purchase of the property, stamp duty may be payable, depending on whether the purchaser is a first-time buyer. First-time buyers are now exempt from stamp duty on the purchase both new and second-hand homes.

An important point from the purchaser’s perspective is that the developer can show that its bank will release its security over the property. Otherwise, the purchaser would not be able to put his or her own mortgage on the property and the option to buy will not ever be capable of exercise.

MacSweeney & Company has significant expertise in structuring "rent to buy" schemes.