Rent-to-buy: how the contract works and what role the notary plays

A ‘rent-to-buy’ agreement is a contract granting the right to use a property with a view to its subsequent sale, governed in Italian law by Article 23 of Decree-Law 133/2014, known as the ‘Sblocca Italia’ Decree. This arrangement allows the owner, known as the grantor, to immediately grant the tenant the right to use a property, granting them the right to purchase it at a later date within a specified period and crediting a portion of the rent paid towards the purchase price.

In other words, the ‘rent-to-buy’ scheme allows you to move into the property straight away by paying a regular rent, and to decide later whether to buy it, with part of the rent going towards the final purchase price.

This arrangement can serve as a flexible option for those who wish to become homeowners but do not currently meet the criteria for a bank loan or prefer to defer applying for one. The tenant pays a regular rent comprising two components: one portion to cover the cost of using the property and another portion towards the price of any future sale. At the end of the agreed term, the tenant has the option to decide whether to purchase the property by paying the outstanding balance or not to purchase it, subject to the financial consequences set out in the contract.

What is a ‘rent-to-buy’ contract, and how does it differ from a ‘rent-to-own’ arrangement?

To understand what it is and how it works, it is necessary to clarify the contractual nature of the transaction, which is expressly governed by Article 23 of Decree-Law 133/2014. ‘Rent to buy’ is often generically equated with ‘rent with an option to purchase’. However, whilst the term ‘rent with an option to buy’ encompasses various contractual arrangements (such as a lease with an option to purchase), ‘rent-to-buy’ is instead a specific contractual arrangement expressly regulated by law, in which the tenant immediately gains the right to use the property and may subsequently decide whether to purchase it. ‘Rent-to-buy’ must also be distinguished from a sale with retention of title, which constitutes a different contractual arrangement in which the transfer of ownership takes place under different terms.

It is also important to distinguish between a ‘rent-to-buy’ arrangement and a traditional preliminary sale and purchase agreement:

• In the preliminary contract, both the prospective seller and the prospective buyer undertake to enter into the final property sale and purchase agreement by a specified date;
• In a ‘rent-to-buy’ arrangement, the lessor undertakes to ensure the tenant’s right to use the property and to transfer ownership of it should the tenant exercise their right to purchase, whilst the tenant takes possession of the property immediately and retains the option to decide whether to purchase it.

The tenant may choose whether to purchase the property, without being automatically obliged to complete the sale: the exercise of the right to purchase the property remains a discretionary option.

How a rent-to-buy contract works: the breakdown of the monthly rent

The economic structure of a rent-to-buy contract is based on the mandatory breakdown of the sum paid at regular intervals. Upon signing the contract, the parties must precisely determine the two components of the rent:

• usage component: this is the part of the rent intended to remunerate the use of the property and is treated for tax purposes in accordance with the rules applicable to the usage component;
• deposit: this represents an advance payment towards the price of any future sale, which will be deducted from the outstanding balance at the time of the final sale.

The law does not prescribe a fixed percentage for dividing the two instalments: the amounts of the advance payment and the final instalment are freely agreed between the parties, but the precise specification of the proportion of the price allocated to each instalment is an essential element of the contract.

This allocation is accompanied by provisions governing the failure to exercise the right: pursuant to Article 23, paragraph 1-bis, the contract must specify the proportion of the rent allocated to the consideration which the lessor must refund in the event of failure to exercise the right of purchase. Should the tenant decide not to purchase the property, they are not in breach of contract; the parties remain bound by the agreed terms regarding the portion of the deposit to be refunded and the portion to be retained by the landlord.

A numerical example of a ‘rent-to-buy’ transaction

To understand the financial aspects of a rent-to-buy contract, let us consider an agreement relating to a property with an agreed value of 200,000 euros:

• contract duration: 5 years (60 months);
• total monthly rent: 1.000 euros;
• usage fee (50 per cent): 500 euros per month, amounting to a total of 30.000 euros, intended to cover the cost of using the property and not included in the purchase price;
• amount included in the price (50 per cent): 500 euros per month, totalling 30.000 euros included in the price;
• final balance at the conveyancing: 170,000 euros (equivalent to the original price of 200,000 euros minus the 30,000 euros deducted from the price);
• should the right of purchase not be exercised, the contract provides for the refund of 70 per cent of the amount charged at the price;

If, at the end of the five years, the tenant exercises their right to purchase, they will pay the outstanding balance of 170.000 euros. If, on the other hand, they decide not to purchase the property, they must vacate the premises and the lessor will refund 70 per cent of the amount allocated to the purchase price, amounting to €21.000, retaining the remaining €9.000, in addition to the rent paid for the use of the property.

This example is for illustrative purposes only: the amounts, the duration of the contract, the breakdown of the rent and the amount to be refunded may be freely agreed between the parties.

Registration of the ‘rent-to-buy’ agreement and legal safeguards at the notary’s office

In order for the contract to be registered in the land registry, a ‘rent-to-buy’ contract must be drawn up as a public deed or a private agreement authenticated by a notary. Registration is one of the most important aspects of this type of contract, as it protects the tenant against any adverse events that may occur after the contract has been signed.

In particular, transcription has two main effects:

• It guarantees the right to use the property until the expiry of the contract. A registered ‘rent-to-buy’ contract is enforceable against third parties, by virtue of the reference to Article 2643, first paragraph, point 8), of the Civil Code. If the lessor sells the property during the term of the agreement, the new owner must honour the contract that has already been registered and may not terminate the tenant’s right of use before the agreed expiry date. The same applies if ownership is transferred by succession following death. In both cases, the tenant’s right to purchase the property on the agreed terms remains unaffected;
• It safeguards the future purchase of the property. If, after the ‘rent-to-buy’ agreement has been registered, the owner grants a mortgage to a bank or a creditor registers a charge against the property, such subsequent encumbrances do not affect the tenant’s right to exercise the right of purchase within the time limits set out in the contract. In other words, the tenant will be able to become the owner without being affected by those subsequent registrations, which will therefore not be enforceable against them.

The registration of a ‘rent-to-buy’ agreement gives rise to two forms of protection with different durations. The enforceability of the right of possession against third parties is governed by the rules applicable to the registration of tenancies exceeding nine years. The reservation effect, which protects the future purchase, applies, however, for the duration specified in the contract and in any event for no longer than ten years (Article 23(3)).

The situation is different in the case of mortgages, distraints or other encumbrances already in place before the ‘rent-to-buy’ agreement is signed: these encumbrances remain enforceable against the tenant. For this reason, the notary carries out legal, mortgage and land registry checks on the property in advance and also verifies the planning documentation.

Non-payment, enforcement proceedings and insolvency

The Act sets out in detail the consequences of non-compliance and the safeguards for the parties:

• default threshold: the contract is terminated in the event of non-payment – even if not consecutive – of a number of instalments determined by the parties, which may not be less than one-twentieth of the total number of instalments. For example, for a plan comprising a total of 60 instalments, the threshold may not be less than 3 instalments;
• eviction procedure: in the event of termination due to non-payment of rent, the landlord may request the eviction of the tenant in accordance with the procedures laid down by law;
• compulsory liquidation and protection of the parties: if the lessor is subject to compulsory liquidation (the procedure that has replaced bankruptcy), the rent-to-buy contract is not automatically terminated and the tenant continues to benefit from the protections provided for by law, including the possible reimbursement of any sums to which they are entitled. If, on the other hand, the judicial liquidation concerns the tenant, it will be up to the liquidator to assess whether or not to continue the contract in accordance with the relevant legislation.

Benefits, risks and when a ‘rent-to-buy’ scheme isn’t worth it

The benefits for buyers and sellers

The main benefits for the parties can be summarised as follows:

• for the tenant: this allows them to occupy a property without having to tie up the entire deposit at the time of the conveyance. A history of regular payments can help demonstrate the ability to meet a recurring financial commitment, but does not guarantee that the bank will grant a mortgage in the future;
• For the lessor: this allows the property to be made available for use immediately, whilst receiving a regular rent and retaining ownership until any final sale takes place.

The risks and situations in which this approach is not advisable

A ‘rent-to-buy’ scheme may present difficulties or prove to be uneconomical when:

• there is no reasonable prospect that the tenant will be able to secure the necessary financing to pay the outstanding balance, with the risk of having to vacate the property;
• there are any prior mortgages or attachments that have not been discharged or dealt with in advance;
• the contract does not clearly specify the amount of the deposit to be refunded should the right of purchase not be exercised;
• the price of the property was set at a level out of line with the market without adequate expert valuations.

Management and maintenance costs, and property taxes

With regard to the management of the property during the term of the agreement, Article 23 of Decree-Law 133/2014 – specifically Article 23(3) of Decree-Law 133/2014 – refers, insofar as they are compatible, to only some of the provisions governing usufruct: Articles 1002 to 1007 and Articles 1012 and 1013 of the Civil Code:

• maintenance and costs associated with use: routine repairs, the upkeep of the property and service charges relating to its use are normally borne by the tenant, in accordance with the applicable regulations and the terms of the tenancy agreement;
• Extraordinary repairs and property taxes: extraordinary repairs are normally borne by the lessor, except where otherwise provided for by law. The IMU is normally payable by the owner, whilst the TARI is generally payable by the person occupying and using the property.

What taxes are payable under a ‘rent-to-buy’ scheme?

The taxation of ‘rent-to-buy’ schemes depends on various factors, including the nature of the lessor (private individual or business), the type of property and the applicable tax regime. For this reason, there is no single tax rate that applies to all contracts.

Specifically:

• Usage fee: this is the portion of the rent paid for the use of the property during the term of the contract. The tax treatment varies depending on whether the lessor is a private individual or a business, and on the applicable tax regime.
• Amount allocated to the price: this is the portion of the rent that constitutes a deposit towards the future purchase of the property. Here too, the tax treatment depends on the nature of the lessor, the type of property and the tax regime applicable to the transaction.
• Final transfer: if the tenant exercises their right to purchase, the taxes applicable to a standard sale apply at the time of the deed of sale. In the case of a private sale of a ‘first home’, the registration tax is 2 per cent, with a minimum of 1.000 euros, plus 50 euros in mortgage tax and 50 euros in land registry tax. Without tax relief, the rate rises to 9 per cent. The taxable amount is the agreed price; however, a buyer who is a natural person may request in the deed that the ‘price-value’ criterion be applied, which bases the tax on the revalued cadastral value. If the sale is subject to VAT, the rules specific to that regime apply. Registration tax already paid on instalments is deducted from the amount due at the time of the deed of sale (Revenue Agency, Circular No. 4/E of 19 February 2015).

The ‘rent-to-buy’ scheme can also be used for commercial properties, land and properties under construction. In the latter case, the contract must comply with the special regulations designed to protect purchasers of properties yet to be built.

The terms of the rent-to-buy contract that need to be carefully considered

In order to clearly define the relationship and minimise the risk of disputes, the contract should set out the following in detail:

1. property identification: precise cadastral identification of the property and details of the information and documentation relating to its town planning, building and energy status;
2. duration and expiry date: an indication of the duration of the right of use and the deadline for exercising the right of purchase;
3. price and breakdown of the rent: determination of the sale price, or any objective criteria for its adjustment, and a detailed breakdown of the rent into the portion relating to the right of use and the portion attributed to the price;
4. refund policy: precise calculation of the deposit to be refunded in the event that the purchase does not go ahead;
5. default threshold: an indication of the minimum number of unpaid instalments, whether consecutive or not, which triggers termination, in accordance with the threshold laid down by law;
6. allocation of expenses: settlement of routine and non-routine maintenance costs, service charges and taxes;
7. further provisions governing the tenancy: the procedure by which the tenant must give notice of their intention to purchase, the consequences of the landlord’s failure to fulfil their obligations, provisions regarding any works and improvements carried out by the tenant, insurance of the property, and the possibility of assigning the tenancy agreement.

For further information on the checks and formalities involved in property transactions, please refer to the section of our firm’s website dedicated to property transfers.

FAQ – Frequently asked questions about rent-to-buy contracts