This memorandum outlines the framework of the “rent to buy” agreement and the lease agreement with option to sell, in order to highlight the advantages that this new type of contract presents compared with the traditional scheme. This memorandum is composed in two parts: defining the main schemes of both types of agreements in order to distinguish between them; highlighting the main advantages when using the “rent to buy” instead of the traditional lease with option to sell.
- The distinction between “rent to buy” and lease with option to sell.
The “rent to buy” is defined by law as “the contract, different from financial leasing, that provides the lessee with the immediate enjoyment of a real estate, and with the right to acquire the property of such asset at a certain deadline, against the payment of its price reduced by the part of licence fees indicated in the agreement”. Accordingly, the operation is structured into two parts. In the first part, the lessor grants the enjoyment of the asset, and the lessee pays a periodic licence fee which includes an amount paid for the use of the asset, and an amount based upon the anticipation of its purchase price. In the second part the lessor purchases the asset, against the payment of its price reduced by the amount already paid as part of anticipated sale price under the lease.
Whereas, the lease agreement with option to sell is a contract of leasing which includes an option providing for a separate contract to sell. Therefore, leasing and selling are not a single unified economic transaction under one sole agreement, instead there are two separate transactions with two different agreements. First, there is a transaction that falls under the general provisions of the lease agreement. Second, there is a transaction that falls under the option agreement as a separate agreement to sell. The transactions are connected in the sense that they are interrelated if one selects the option to sell and then pursues that economic result.
While the distinction between the rent to buy and lease with an option to sell may not seem clear and immediate, in the abstract, the agreement should be considered as a “rent to buy” when the parties intend to establish a single unitary relationship characterised by leasing with an additional amount paid for the right to buy. Alternatively, an agreement should be construed as a lease when the parties intend to undertake two separate transactions: leasing and leasing with an option to purchase. In this latter agreement, only a leasing amount is paid and not an additional amount in anticipation of the intended purchase price. In practice, the essential element to distinguish between the two contracts is represented by the composition of the licence fee. In particular, the agreement falls under the “rent to buy” scheme whenever the licence fee is split into two parts, a portion aimed to remunerate the enjoyment and a portion aimed to anticipate the price.
- First advantage of the “Rent to buy”: the freedom of negotiation
The contract of “rent to buy” presents many advantages compared with the lease with option to sell. The first advantage consists in the freedom of negotiation. Indeed, the lease with an option to sell is entirely subject to the restrictions provided by the Law 392/1978 and by the Law 431/1998, and all the consequent mechanisms mandating the imperative substitution of clauses which do not comply with such provisions. In this agreement, each transaction remains governed by the regulation of the law for its respective type (lease, and option to sell). The mere connection between the transactions does not affect the applicable regulation.
Instead, the “rent to buy” is exempted by the application of the imperative provisions set by the law in relation to the lease. In this agreement, the parties shall remain entirely free to negotiate and agree upon the duration of the enjoyment, the early termination of the commitment, the amount and the raise of licence fees, the sublease and contract assignment, and all the mechanisms related to pre-emption, release, and indemnity for the loss of goodwill.
- Second advantage of “rent to buy”: the enforcement in case of non-fulfilment of the lessee
The second advantage consists in the timing of the enforcement in case of non-fulfilment of the lessee. In the lease with option to sell, the lessor is compelled to bring two different actions before two different judicial authorities. Previously, lessor needed to demand the verification of the entitlement and the breach of the contract in an ordinary trial, though this trial should be enough rapid, since it is regulated by the summary procedure of eviction stated in the article 658 c.p.c. Afterwards, once the judicial verification is obtained, lessor may proceed with the execution. Consequently, the satisfaction of the lessor’s interest requires two different proceedings, causing protracted time and costs.
Instead, the “rent to buy” represents itself an enforceable title for the release of the asset, providing that it is stipulated in the form of a notarial deed, and providing that it contains an express termination clause in relation with the failure to pay the licence fees due. Therefore, in case lessee does not fulfil all the lease to buy obligations, the lessor does not need to demand the verification of the entitlement and the breach of the contract, and can immediately proceed with compulsory execution. Nevertheless, this occurs only in case all the conditions previously mentioned are met. Indeed, on the basis of article 474 c.p.c. and on the basis of article 605 c.p.c., notarial deeds represent enforceable titles for the release of the asset only when they provide a right to restitution that is irrefutable, liquid and collectable. Consequently, it is not sufficient just to have a notarial deed, it also must vest the lessor with a right to restitution that is already certain and does not require any judicial verification. In this regard, it is necessary that the contract provides an express termination clause.
- Third advantage of “rent to buy”: the effectiveness against third parties
The third advantage consists in the possibility to claim the contract against third parties that have acquired rights on the asset after its registration. On the basis of the article 2643 c.c., the lease agreement could be registered only whether its duration would exceed nine years, and this does almost never happens in the economic practice. Since the acts subjected to registration in the land register are exhaustively stated by the mentioned norm, the lease that does not exceed the 9-year term limit cannot be registered. Consequently, the lessee bears the risk that, in the time between the conclusion of the agreement and the exercise of the option, another person makes a prejudicial registration(s).
This risk is resolved with the “rent to buy”, since it is always subject to registration, regardless of its duration. Furthermore, this registration produces the same effect of the preliminary agreement’s registration, that is to say a “booking effect” for the following transfer. In other words, the registration of the contract anticipates the effects of the registration of the following transfer. This neutralises the risks related to any later registration. However, this “booking effect” expires in case the lessee does not proceed to the registration after the transfer and, in each case, within ten years from the first registration.
In conclusion, the new “rent to buy” contract, as regulated by recent law, represents an agreement extremely helpful economic practice. The new contract ensures: (i) the parties remain free to negotiate the deal that best fits their interests without any restrictions, (ii) the lessor can obtain the restitution of the asset without the necessity of a judicial verification, and (iii) the lessee can avoid the risk of any prejudicial registrations.