If you are having trouble getting together enough money for a home deposit or getting approval for a loan, a “rent to buy” property scheme may seem like a good idea.
However, if you are considering an arrangement like this to get a start in the property market, you need to be very careful and be aware of the risks posed by these types of schemes.
What is a rent to buy property scheme?
Under a typical rent to buy property scheme, the purchaser enters into a contract for sale with a property seller but the purchase price is paid off by instalments over a period of time, say 25 years.
The purchaser must pay a deposit as would be required under a normal property sale contract and is permitted to occupy the property, as a tenant or a licensee. Only after all the instalments are paid can the purchaser become the registered owner of the property.
What are the major risks for the purchaser?
There is a long list of major risks for a purchaser in this type of arrangement including:
- The purchaser has NO legal interest in the property at all until all payments are made and the purchaser becomes the registered owner of the property.
- No legal interest in the property means there is no security. If the purchaser defaults on the instalment payments, this will often allow the seller to terminate the contract, evict the purchaser and the purchaser can risk losing all instalment payments made to that point in time.
- The purchaser generally pays more than market rent each month and often pays an inflated purchase price.
- If the property seller has their own mortgage over the property, then a purchaser has no control over whether the property seller complies with that mortgage. For instance, if the property seller defaults on its own mortgage obligations, the financier can take steps to re-possess the property and evict the purchaser. There is very little the purchaser can do if this occurs.
- Even though the purchaser does not have any ownership, the purchaser is normally required to pay all of the rates and is obliged to maintain the property. If the purchaser is evicted for any reason, the purchaser will lose the value of any improvements that they may have made to the property.
Can the Contracts Review Act assist?
The Contracts Review Act (Act) may provide a way out if a contract, or a provision of a contract, is considered by the Court to be unjust or unfair. In some circumstances, this may assist you if you have entered into a rent to buy arrangement. Each case will be considered on its individual facts.
In the recent NSW Supreme Court case of Evolution Lifestyles Pty Ltd v Clarke (No 3)  NSWSC 1237 (Evolution Lifestyles) which involved a rent to buy contract, the Court held that the contract was unjust under the Act.
The Court considered the purchaser’s lack of education, the inadequate independent legal advice given to the purchaser, the pressure placed on the purchaser to enter into the agreement and the lack of opportunity to negotiate the contract. The Court found that the contract was overtly unfair.
In Evolution Lifestyle, the Court ordered that the contract was set aside, that the purchaser give vacant possession to the seller and ordered the seller to pay the purchaser the difference between the deposit, instalments, and cost of improvements paid by the purchaser and the market rent during the purchaser’s period of residence.
If you, or anyone you know, has entered into a rent to buy arrangement and you need some help, please contact us to discuss your circumstances.