On the lease purchase agreement in Spain

In the current situation of the real estate market, it is practically essential to find ways to facilitate real estate transactions, such as those in which deferred payment structures are established over time. However, mere agreement on the payment structure is not sufficient, as the same structure - e.g. €35,000 on signing, €2,500 per month for 3 years, with a final payment of €100,000 - can be legally articulated in several ways. Each of these forms will have its specific advantages and risks (especially in relation to the transfer and obligations arising from the status of owner), and it is essential to be aware of the implications of the legal transaction to be carried out. Moreover, while an ordinary sale and purchase is a business that is consummated in itself (seller and buyer receive, respectively, price and property and, probably, will not see each other again), the deferral of payments necessarily creates a legal relationship that will last over time. In this post we will analyse the particularities offered by one of the forms in which an operation such as the one mentioned above could be structured: the lease-purchase contract.

What is it?

The lease with purchase option is a complex legal business made up of two different contracts: a lease contract (which, in the case of an urban property, will be governed by the provisions of Law 29/1994, on Urban Leases), and a purchase option contract, which is an atypical business, not expressly regulated in the Civil Code. As we can see from the above definition, the lease contract with option to purchase is not a sale and purchase deferred in time. Therefore, we cannot speak of the positions of seller and buyer, but must speak of lessor-grantor and lessee-optioner, or simply lessor and lessee.

It is not a sale and purchase...

The first thing to bear in mind is that a lease with purchase option is not a purchase and sale, i.e. ownership of the property is not transferred - at least not until the lessee-optioner exercises his right of purchase option. We must therefore be aware that this involves the risks inherent in a lease contract.

The lessor-landlord must be aware of the risks inherent in his position as landlord. His obligations include not only purely financial obligations (payment of taxes, community charges, etc.), which may be passed on to the buyer-lessee, but also legal obligations, both towards the lessee (maintenance of the property) and towards third parties (damage to neighbours - flooding -, urban planning liabilities, etc.), as well as the risk of loss of the property.

The lessee-optant, for his part, must be aware that he will have a limited right over the property (he is not the owner, but a lessee) and therefore cannot carry out certain actions unless they are expressly authorised in the contract (works, etc.).

Furthermore, in the event of non-compliance with the tenant's obligations (payment of rent, maintenance of the property, etc.), the seller-landlord may request eviction and termination of the contract, and will therefore also lose the right to purchase the property.

...but it can become so

As we have seen, the lease with option to buy is not a purchase-sale, but it can become one in the event that the lessee decides to exercise his right to purchase the property. Therefore, at the time of signing the contract, it is not a sale and purchase, but it has the potential to become one. For this reason, it is necessary to take into account issues that will be applicable in the future, since it is common for several years to pass between the negotiation of the contract and the exercise of the purchase option. Only with a comprehensive regulation can the parties be clear about their rights and obligations in this respect. In addition to the questions that are essential for the correct regulation of the purchase (identification of the object, condition in which it is acquired, status of encumbrances, etc.), the option to purchase has a number of special features that must be taken into account, especially since there is no directly applicable legal text that can be supplemented in the event that a complete regulation has not been included.

What needs to be regulated in the purchase option?

As we have pointed out above, the lack of a supplementary legal regime makes it very important to regulate the hire-purchase contract carefully, as it has to be a tailor-made contract, in accordance with the will of the parties. With regard to the option, at least the following issues should be regulated.

Initial payments

At the signing of the lease-purchase contract, the lessor-grantor can require the lessee-optant to pay certain amounts. However, these amounts delivered may have different legal forms (deposit, additional guarantees, option premium, etc.), and may be used (or not) to reduce the purchase price, depending on what has been agreed, which is why it is an essential point that needs to be expressly regulated.

Application of rents

Another relevant issue to be taken into account is the application of rents to the purchase price. Since there is no applicable legal provision, it is essential to regulate this clearly in the contract. Among others, the following options should be considered:

1. If the rents paid by the lessor are going to be applied to the purchase price of the property, to reduce it or not.

2. If they are applied, in what percentage can they be applied to the purchase price, i.e. whether 100% of the rents paid, 80%, etc. will be subtracted from the purchase price.

3. Whether the same percentage will be applied throughout the entire period of the purchase option or whether, on the contrary, it will decrease each year (100% in the first year, 80% in the second year, etc.).

There are many alternatives and it is a mechanism with an enormous economic impact for both parties. Furthermore, depending on the regulation agreed, it may encourage or discourage the lessee from exercising the option early.

Timing of exercise

The time of exercise is also a key factor that can be regulated in various ways. Although it is usual to grant the purchase option to be exercised at any time during the term of the lease, it is true that the time at which the property can be acquired can be limited in time (in certain months, after a certain number of years, etc.). In any case, it should be borne in mind that, above all, it is an option given to the tenant-buyer, so it is possible that the tenant may decide not to buy the property, and the owner of the house will be frustrated in the sale.

Purchase price

With regard to setting the purchase price of the property, there is only one requirement: that it must be determined or determinable. The fact that it can be determinable means that it is not necessary to establish a fixed price at the time of signing the option (especially useful in long-term leases). In addition, when setting the price, it is necessary to take into account that several years may pass until the lessee exercises his right of purchase option, so it may be advisable to set formulas for updating the price over the years. As can be deduced from the above, although leasing with an option to purchase is a formula that is widely used at present, it should be clear that it does not produce the same effects as a sale and purchase for either party. Moreover, as it has a very broad scope of regulation and has to regulate future consequences in the present, it is advisable to contact an expert lawyer in real estate matters to help you negotiate and prepare a contract that is exactly tailored to your needs.