Rent-to-own Agreement: Best Practices and Key Considerations

Rent-to-own agreements have become an increasingly popular option for individuals seeking to transition from renting to homeownership. These agreements allow renters to lease a property with the option to purchase it at a predetermined price after a specified period. While they can provide a flexible path to homeownership, rent-to-own agreements are not without their legal complexities, particularly in Nova Scotia.

Compliance with Legislation

Rent-to-own agreements are essentially two agreements bundled into one: a rental agreement and a purchase agreement. It is crucial to clearly outline the terms and conditions for both phases of the arrangement.

Nova Scotia’s Residential Tenancies Act (the “RTA”) governs the rights and responsibilities of landlords and tenants in residential rental agreements. Even though the eventual goal is home ownership, the RTA still governs the relationship during the rental phase. As such, the terms of the rent-to-own agreement must comply with the RTA.

Similarly, once the sale occurs, there are separate requirements, such as those in the Land Registration Act. It is equally important for the parties to ensure that good title is being conveyed at the end of the Agreement.

Purchase Price and Appraisal

One of the fundamental aspects of a rent-to-own agreement is the agreed-upon purchase price of the property. Often, the agreement simply states an agreed upon price, so that both parties have certainty of outcome at the beginning. Nevertheless, depending on the length of the rental term, the parties may want protection against potential price fluctuation over time. One option is to agree to a third-party appraisal at a specified time to set the price.

Option Payment and Down Payment

Rent-to-own agreements often involve an initial “option payment,” which grants the tenant the right to purchase the property at a later date. Additionally, there might be a separate down payment required when exercising the purchase option. Clearly defining the purpose and conditions of both payments is essential to prevent misunderstandings later on – particularly in instances where the sale fails to occur. Further, clearly delineating such payments from the rental of the property is important to ensure the landlord is not offside RTA requirements relating to rental payment amounts.

Maintenance and Repairs

Rent-to-own agreements should clearly specify the responsibilities and entitlements for property maintenance and repairs during the rental period. For example:

It is much better to resolve these issues at the front-end of the arrangement.

Default and Termination

The rent-to-own agreement should outline the procedures and consequences in case of default by either party. This includes circumstances where the tenant misses rental payments, breaches the terms of the agreement, or chooses not to exercise the purchase option. Clauses related to termination and eviction of the tenant must adhere to the RTA, which is quite stringent in this regard.

Alternative Option – Vendor

Another viable option is a vendor-take-back mortgage. The seller extends a loan to the purchaser to secure the sale of the property. The main difference is when ownership of the property is transferred. Unlike in a rent-to-own agreement, with a vender-take-back mortgage the purchaser takes immediate ownership of the property.

The main benefits of a vendor-take-back mortgage are:

  1. The purchaser has increased protection by taking possession of the property immediately. For example, if the seller later becomes bankrupt this would not impact the property as title has already been transferred to the purchaser. Conversely, in a rent-to-own arrangement, the landlord remains the owner of the property, exposing the property to the bankruptcy process despite the tenant’s intention to later purchase the property.
  2. If the purchaser fails to meet the terms of the mortgage, the seller still has the right to retake ownership of the property.
  3. The vendor-take-back mortgage reduces the amount of capital required by the purchaser. It allows the purchaser to delay a portion of the payment. The seller also benefits from receiving interest on those payments.

The main downsides of a vendor-take-back mortgage are:

  1. The purchaser is typically required to pay a portion of the sale price immediately. While there is some flexibility, generally more capital is required at the outset.
  2. If the purchaser fails to make mortgage payments, the process to retake possession of the property is more complex than in a rent-to-own agreement.
  3. The purchaser takes on all of the responsibilities of homeownership right away, which can require significant time and may result in unexpected major expenses.

Legal Review and Advice

Given the complexity of legal issues in rent-to-own agreements (or vendor-take-back mortgages), it is strongly recommended that both parties seek independent legal advice before entering into such an arrangement. Legal professionals with expertise in property law and contract law can help draft a comprehensive agreement that protects the interests of both parties. Similarly, if disputes arise during or after the agreement is formed, legal advice is almost always warranted.

Conclusion

Rent-to-own agreements can offer a promising path to homeownership for tenants and a reliable income stream for landlords. However, due to the intricate legal landscape in Nova Scotia, it’s imperative that both parties carefully consider and address the legal issues discussed in this article. By creating a well-structured, legally compliant agreement, renters and property owners can embark on a rent-to-own journey with confidence and a clear understanding of their rights and obligations.

Cox & Palmer’s Real Property Group and Commercial Litigation Group are available to assist with any questions regarding the formation of rent-to-own agreements or vendor-take-back mortgages, as well as any ensuing disputes between the parties.