Residential rent-to-own demystified

Getting financing can be challenging for a number of reasons, including: 

  • the condition of the immovable (e.g. pyrrhotite);
  • the buyer’s financial situation (e.g. non-existent credit history); 
  • tightening of mortgage financing rules.

In these situations, leasing an immovable with a view to buying it in the future can appear to the best solution. But you should know that rent-to-own schemes are complex and not for everyone. You are advised to exercise caution before considering this type of transaction, and to discuss it with your broker.

Pre-occupancy and promise to lease with option to purchase are not one and the same!

Leasing with option to purchase and pre-occupancy are two distinct concepts that are used in very different situations:

  • Pre-occupancy is part of an immovable’s sale process. In this situation the prospective buyer has already undertaken to purchase the immovable via a Promise to purchase, but wishes to occupy the premises before the signing of the deed of sale. 
  • Leasing with option to purchase is part of an immovable’s leasing process. The lessee initially undertakes to lease the premises, but is offered the opportunity to purchase the immovable at the end of the lease, under terms previously agreed to between the parties.

This article deals with the second situation. Following is a summary of what the buyer-lessee and the seller-lessor should know, and the role of the real estate broker involved under the Real Estate Brokerage Act

Obligations of the parties 

When leasing with option to purchase, the obligations of each party differ based on two key moments in the transaction: 

  1. At the time of leasing: At this stage, a lease will be signed. During the term of the lease, the buyer-lessee will be a lessee with all the rights and obligations outlined in the Civil Code, under the jurisdiction of the Régie du logement. 
  2. At the time of purchase: At this stage, the rules governing the sale of an immovable will apply. 

Risks

Certain factors can impede this type of transaction: 

For the seller-lessor: 

For the buyer-lessee:

  • The risk of losing sums paid in rent if he fails to exercise his option to purchase (or if the immovable is sold to another buyer).

Both:

  • The cost of insurance (different for seller-lessor and buyer-lessee).

The broker’s role

Did you know that the Real Estate Brokerage Act and the regulations thereunder also apply to a lease with option to purchase? In such a case the broker must fulfill his duty to verify, inform and advise in the same manner as with any other real estate or mortgage transaction.

To properly guide you, your broker must therefore be knowledgeable on the subject of residential leasing with option to purchase. This means that he must be very familiar and comply with the Real Estate Brokerage Act, the Act respecting the Régie du logement and the applicable rules contained in the Québec Civil Code.

To guide you as to the scenario to opt for in this situation, below is some of the information which your broker can help you obtain and on which he can provide advice:

  • term and conditions of the lease;
  • deadline by which the lessee must decide whether to exercise his option to purchase;
  • conditions concerning an eventual down payment and mortgage loan;
  • selling price, inclusions and exclusions;
  • seller’s prerogative not to sell and fees applicable in this event.

Click on the hyperlinks herein to learn more about the benefits of doing business with a broker at the leasing stage.

Your broker has several tools at his disposal to make sure your transaction goes smoothly, including various forms published by the OACIQ, most of which are mandatory, including:

If necessary, and depending on the complexity of the transaction, your broker can recommend that you get in touch with a legal advisor to validate some of the more technical aspects. 

Leasing with option to purchase: different scenarios 

When appropriate to the situation, leasing with option to purchase allows: 

  • the seller-lessor: 
    • to find a buyer who has a vested interest in being a good tenant and will likely want to maintain the immovable in good condition with a view to purchasing it;
    • earn income to help him pay his mortgage;
  • the buyer-lessee:
    • to improve his credit at a lesser cost, where the rent paid serves as a down payment on the purchase of the property;
    • to avoid the risk of competition with other potential buyers on the price and terms of purchase (the price will be agreed to at the outset);
    • to assume only the responsibilities outlined in the lease. 

A range of possibilities can be explored with your broker based on your needs, including: 

Scenario 1: A person undertakes to lease the premises via a Promise to lease that includes a condition by which he can purchase the immovable within a time frame agreed to by the parties. The seller agrees not to offer the property for sale during that period.

Scenario 2: The lessee is guaranteed a right of preference (or right of first refusal) by the owner. This scenario enables the owner to continue to offer the immovable for sale. The right of preference gives the lessee priority over other potential buyers. This right of preference will allow the lessee to purchase the immovable by presenting a promise to purchase that is equivalent to that of another prospective buyer.  

Scenario 3: If the lessee’s situation permits, a Promise to lease and a Promise to purchase can be presented simultaneously to the owner. These two forms must therefore be linked: in addition to the leasing terms included in the Promise to lease, the Promise to purchase will contain the terms relating to the eventual purchase of the immovable (e.g. financing, inspection, date of signing of the deed of sale, etc.).

To learn more

Visit the Leasing section on the oaciq.com website and read these articles:

You can also contact Info OACIQ information centre by email at info@oaciq.com or by phone at 450-462-9800 or 1-800-440-7170.

 

Last updated on: May 04, 2018
Article number: 204821