The real estate lease-purchase contract is an ordinary lease agreement that includes the unilateral power of the tenant to buy one or several properties at an established or determinable price at the end of a specific period.
Law 29/1994 regulates the lease contract of properties, both for residential and other use in Spain, of 24 November, as part of the Urban Letting Act. However, the purchase option has hardly any legal texts regulating it. Therefore, the parties are free to set the terms of the purchase option.
Although this freedom allows the contractual parties to tailor the purchase option to their needs, it can also lead to unclear and imbalanced situations, which is why it is worth remembering its core elements.
Core elements of the lease-purchase contract
Aim of the lease-purchase option
First, the property object of the purchase option must be specific, since, in leases of multiple properties, the purchase option may:
- Apply to one or more properties
- Limit itself in part to one or several properties, resulting in condominiums or physical divisions of these
- Apply to a different property to the leased one.
Power to exercise the purchase option
The tenant may exercise the purchase option unilaterally. It is important to emphasise that the owner may not hinder such a purchase, as long as the conditions enabling it are met. The owner shall maintain the offer to sell the property (or properties) under the established conditions until the end of the agreed time. It could prevent the sale of the property to third parties or the constitution of encumbrances on the property (or properties), yet the parties will have to agree. In the absence of an express agreement, it would be necessary to interpret the parties’ will of the parties and determine whether the owner’s actions are contrary to the agreements reached or not.
Price and time
Other essential conditions for exercising the purchase option include the price and the period.
The price must be determined or determinable and cannot be changed arbitrarily by one party.
The period must consider:
- The time elapsed since the beginning of the lease (or another starting point agreed between the parties) from which the purchase option can be exercised
- The period available to the lessee from the beginning of the said period to validly exercise this option.
It is now worth briefly highlighting the key benefits and disadvantages of this type of contract.
Benefits of the real estate lease-purchase contract
- It allows lessees to buy a property for a lower price than the market price. The most common formula for determining the price is that the lease instalments, or parts thereof, are deducted.
- Since the purchase option is a unilateral power of the lessees, they can decide not acquire the property if, at the time of exercising the purchase option, they are no longer interested in the acquisition.
- Lease-purchase options allow lessees to benefit from the tax incentives for rental properties (or other types of leases).
Lessors usually agree to increase rent for lease-purchase contracts compared with non-lease purchase contracts. The increase compensates for the lower price of the sale through the lease-purchase contract in an agreed period.
Disadvantages of the real estate lease purchase option
- The cost for lease-purchase options is frequently higher than for ordinary leases
- The absence of the lease-purchase option may be considered a loss compared to the ordinary lease since the costs for the latter are usually lower.
Lessors are limited in their powers of disposal over the property during the duration of the lease-purchase contract. Thus, they cannot sell the property to buyers offering a higher price than that agreed with their lessees, nor can they apply for loans with mortgage guarantees.
Do you need more information about the lease-purchase contract in Spain?
This article is not considered legal advice