DEFINITION
The lease-purchase contract is a legal document that gives the lessee the exclusive right to purchase the leased property for a specified price, term, and conditions.
This contract sets out the conditions under which the option holder can exercise his right to purchase the property. It contains a precise description of the property, including its location, size and features, and the agreed purchase price.
It must also state that part of the amount paid for renting the property will be deducted from the purchase price.
ELEMENTS OF THE LEASE WITH OPTION TO PURCHASE
The main elements of this contract are:
– The granting of the right to decide unilaterally whether to purchase the property.
– The definition of the object of purchase and sale
– The fixing of a time limit for exercising the option
THE RIGHT TO DECIDE UNILATERALLY ON THE PURCHASE OF THE PROPERTY
The party to whom this right is granted has the option of exercising or not exercising this right after the expiry of the period specified in the purchase option.
If the lessee decides to exercise the purchase option, he must notify the owner within the period specified in the contract. From that moment on, both parties must proceed to formalize the sale and purchase of the property by signing a definitive sale and purchase agreement.
This purchase option contract may be separate from the lease or attached to it.
This contract reflects an atypical legal relationship in which the lessor offers the lessee an additional right, namely the right to purchase the property.
It is possible to establish the very personal nature of this contract, in which the parties are fixed and cannot be replaced by others, or it is possible to establish that both parties can be replaced by other persons.
If the very personal nature of the contract is established and the landlord and grantor of the option to buy dies, the option to buy expires at that time and is enforceable at that time, and his position in this contract is not transferred to the landlord’s heirs.
DETERMINATION OF THE PURCHASE OBJECT
In the leasing contract with purchase option, the object of purchase must be clearly defined, as stipulated in article 1273 of the Civil Code.
“The object of every contract must be a thing determined as to its nature. Indefiniteness as to quantity does not prevent the existence of the contract if it is possible to determine it without the need for a new agreement between the parties”.
DURATION OF THE OPTION TO BUY
In addition, the contract of option to purchase real estate also includes the period of validity of the option, i.e., the period during which the holder of the option has the right to exercise it. This period may vary according to the agreement between the parties, and there can be no option contract without a fixed term.
This period may be changed by agreement between the parties.
PREMIUM OF THE CALL OPTION
The contract also sets out the specific conditions under which the call option may be exercised, such as the payment of an option fee or an initial sum of money to secure the right to buy.
This fee is generally regarded as an advance on the final purchase price and may vary depending on the value of the property.
This premium is optional and may or may not be granted.
PURCHASE OPTION IN FAVOUR OF SEVERAL PERSONS
If the option to purchase is granted in favour of more than one person, it is essential to determine the share of each person so that it can be subsequently registered in the Land Registry.
REGISTRATION OF THE LEASE WITH PURCHASE OPTION
The leasehold agreement with purchase option can be registered in the corresponding Land Registry and is not subject to the limit applicable to simple purchase options pursuant to art. 14 of the Mortgage Act:
The contract with option to purchase, or the express agreement or provision that establishes it in any other registrable contract, shall be registrable provided that, in addition to the circumstances required for registration, it fulfils the following:
First. Express consent of the parties to registration.
Second. The price agreed for the acquisition of the property and, where applicable, the price agreed for the grant of the option.
Three. The period for exercising the option, which may not exceed four years.
In the case of a lease with a purchase option, the duration of the option may be for the entire term of the lease, but it will necessarily expire in the event of the tacit or legal renewal of the lease.
NON-EXERCISE OF THE PURCHASE OPTION
It is important to emphasize that if the lessee decides not to exercise his purchase option, he is not obliged to do so and may continue the lease until its expiry, unless there is an express agreement to the contrary.
It should be borne in mind that if the lessee has paid a premium for exercising the option and renounces the lease before the agreed period for exercising the option, he is not entitled to recover the premium, as established by our Supreme Court in its judgment of 19 February 2020, STS 604/2020.
HOW DOES VAT AFFECT THIS LEASE WITH PURCHASE OPTION CONTRACT?
According to the binding question V2509-09 of the Directorate General of Taxes, Subdirectorate General of Consumption Tax, dated 13 November 2009
1. The promotion of dwellings with a view to their sale, transfer, or conveyance by means of leasing contracts with a purchase option, from which it can be clearly deduced that the promoter’s intention is to carry out the said sale, transfer, or conveyance, will give rise to the full right to deduct.
In this type of transaction, there is no right to taxation for own consumption as referred to in letters c) or d) of Article 9.1 of Law 37/1992.
In these cases, subsequent leasing with a purchase option will be taxable and not exempt.
If the lease payments are required from 28 October 2009, the applicable tax rate will be the reduced rate of 7 or 4 per cent, depending on the classification regime. For those required up to and including 27 October 2009, the tax will be accrued at the general rate of 16 per cent.
If the tax has been paid at the general rate in the previous lease and it has been expressly agreed in the contract that part of the lease payments will be considered as a purchase price once the purchase option has been exercised, the tax payments initially calculated at 16 per cent must be corrected to correct their taxation at 7 or 4 per cent, depending on the classification of the dwelling to be delivered.
2. The development of dwellings to be rented without the option to purchase will make it impossible for the developer to deduct the tax.
On the other hand, if the decision to rent without the option to purchase is taken after the construction, the tax on personal consumption will be levied in accordance with article 9.1.c) of Law 37/1992.
In either of the previous two cases, the subsequent lease is subject to the tax, but is exempt from it.
3. The use of a dwelling under a hire-purchase contract does not exhaust the initial supply of a building.
CONCLUSIONS
In summary, the lease-purchase contract offers the tenant the possibility to live in a rented property with the option to buy it in the future. This type of contract gives the tenant flexibility, allowing him to assess whether the property meets his expectations before formalizing the sale and purchase.
It is important to note that the option to purchase contract is binding on both parties and therefore carries with it legal obligations and responsibilities. Failure to comply with any of the clauses in the contract may result in legal action being taken by the party concerned.
This type of contract is a common tool in property transactions as it provides security for both parties. The seller is assured that the buyer will keep their commitment to purchase, while the buyer is given the exclusive right to purchase the property without having to do so immediately.
As this is a complex contract, it is necessary to seek the advice of an expert in property law to avoid problems down the line. If you need help with this type of contract, please contact us.
