In a fast-growing city like Dubai, the rent-to-own scheme has swiftly gained traction amongst aspiring property owners as an alternative option to own a property, by paying rent under the scheme which will ultimately be converted to equity.
Article 513 of UAE Civil Code stipulates that: '' (1) If the price is deferred or payable in installments, the seller may stipulate that the transfer of ownership to the purchaser be suspended until he pays the whole price, notwithstanding that the goods have been delivered. (2) If the price is paid in full, the transfer of ownership to the purchaser shall operate retrospectively to the time of the sale''. This article could be seen as a source of the rent-to-own scheme concept which commonly stands in need of a tenant paying rent to the owner over a fixed time frame. The accumulated rent will be transformed into equity subject to the tenant decides to buy the property when the lease expires. As reported by the Dubai Land Department, the rent-to-own scheme is exclusively limited to freehold areas in Dubai. Moreover, this type of contract is not new to the real estate market, as it has already been implemented by Islamic banks.
Aspiring property owners are usually dissuaded by the prohibitively expensive down payment to purchase a home, requested by the bank, generally 25% of the property value, in addition to 8% in interest. Predominantly, 70% of Dubai's population encounters this hindrance, they are lacking the necessary down payment required by the bank or they have simply no proper planning involving their stay in Dubai for a long-term period.
Accordingly, the rent-to-own scheme gives the edge to developers by offering them the opportunity to sell their present properties instead of having them sit on the market, pulling down the market prices, particularly when supply stays high and demand is restricted.
Likewise, the rent-to-own scheme offers numerous advantages to the buyers. In the form of monthly rent, the down payment would be paid to the seller by the end of the contract. (It is worth mentioning that the buyer must expect additional fees to purchase the property). Furthermore, the market is frequently fluctuating, especially with Dubai Expo 2020 on the horizon, rent-to-own is a considerable option to lock the price of a house.
Moreover, moving to a new house regularly is an unpleasant move. With the rent-to-own scheme, tenants can test their home, before deciding to own it.
It is important to note that there are two types of rent-to-own lease agreements.
The lease-option offers the right to purchase the property when the lease expires by paying an "option fee" which represents a percentage of the property's price. In case the tenant decides not to buy, he will simply lose the option money without any obligation to buy.
Whereas the lease-purchase contract, allows the tenant and the owner to come to an understanding over a fixed purchase price and a future closing date. This type of contract obliges legally the tenant to purchase the property at the end of the lease, whether he can afford it or not.
Dubai Land Department has developed a legal framework to adopt these types of contracts and registration in them, with the issuance of a conditional title deed. Dubai Land Department has also regulated the fees to register for a rent-to-own contract. Sellers should expect to pay 2% of the sale price. Whereas, buyers would pay: 2% of the sale price, AED 250 as the Title Deed issuance fees, Map Issuance Fees, 0.25% of the rent amount, AED 10 of Knowledge fee and Registration fees that amount AED 4,000 for properties equal to or exceeding AED 500K or AED 2,000 for properties priced at less than AED 500K.
It is important to stay mindful of all the terms and conditions in the contract to avoid misconceptions. For instance, it is substantial to check that the property value is what was agreed on; verify the number of years on the contract; make sure that the total rent amount would be deducted from the purchase value or a percentage of it; some sellers refund a certain percentage of the down payment, check if it is refundable or not; and verify the exit terms and conditions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.