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Bridge Beat

Dec 7, 2011

Rent-to-Own Condominiums: Opportunity or Peril?

Recently, we have been approached by clients asking us to review Agreements of Purchase andSalefor “Rent-to-Own” condominium units and to advise them as to the risks involved.  The term Rent-to-Own reflects those agreements which combine an occupancy agreement for a specified time period with a purchase agreement, for an agreed-upon price. Monthly “payments” are required of prospective purchasers and a portion of each “payment” is applied to the purchase price as a “deposit” and the remaining portion is a non-refundable “occupancy fee”. At the end of the occupancy period, the purchaser typically must come up with the balance of the purchase price.   It’s easy to see why the rent-to-own option appeals to prospective homeowners:  
  • - Typical agreements of purchase and sale for condominium units require   deposits of at least 20%-25% of the purchase price while the rent-to-own option allows the opportunity to purchase a condominium unit by payment of 5% of the purchase price.
 
  • - Prospective purchasers can live in the unit and decide whether they would like to commit to purchasing at the end of the rent/occupancy period.
 
  • - Affords the purchaser a longer period of time to arrange mortgage financing and/or repair credit.
  While the advantages are numerous, the most obvious disadvantage is that purchasers who opt out of purchasing the unit in accordance with the terms of the rent-to-own agreement are deemed to be in default, their deposits are forfeited and they are not returned the portion of the monthly payments that are “occupancy fees”. Accordingly, purchasers must determine whether the monthly payments are competitive as rent payments.   In addition, protections that are available to true purchasers of new homes cannot be fully realized by rent-to-own purchasers. For example, the deposits made by a purchaser under a typical agreement of purchase and sale are held in trust in accordance with the Condominium Act (Ontario) and protected by Tarion, which provides deposit insurance for up to $20,000 in the event the sale is not completed.  This protects purchasers in projects where the developer goes bankrupt, or if the developer breaches a fundamental term of the agreement.   In the rent-to-own agreements, only a small fraction of the initial payments are attributed as "deposits" and thus eligible for deposit insurance under the Act.  This may expose some purchasers to risk with developers that may face economic difficulty.  This risk is mitigated somewhat due to the fact that most “rent-to-own” options are offered in projects that are very close to completion.   Each ‘rent-to-own’ agreement can be structured differently, therefore, it is best to carefully review its terms and examine the risks involved with a lawyer.  

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