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Kristine King: A 101 on Rent-to-Buy

Monday, April 15, 2019

IMG CREDIT: UNSPLASH

Rent to buy can be an option to purchase a home when you are not in a position to borrow from a bank and purchase on the open market. However, there are several issues that vendors and purchasers should consider.

Securing the Purchaser’s Occupancy

The purchaser has a beneficial interest in the property, which gives them a right to caveat the title to the property. A caveat is a notice to the Registrar not to register any instruments against the title without the consent of the caveator and ensures that the vendor cannot sell the property to another person. Purchasers should consider registering a caveat against the property once the agreement is signed. A caveat does not prevent a mortgagee sale.

Payments of rent vs purchase price

Usually, the purchaser will be paying rent as well as the purchase price. The agreement should be clear about what amounts are being paid for each category.

Transfer of Ownership

It is unlikely that the entire purchase price will be paid before the vendor transfers title to the purchaser, as it could take decades to fully pay the purchase price (41.67 years at $300.00 a week for a $650,000.00 property). Instead, once the purchaser has built up enough equity to be able to obtain a bank loan, the agreement will provide for the balance of the purchase price to be payable. The parties should consider whether the balance should be payable upon a fixed date or after one party gives notice to the other. Factors to consider include the likelihood of bank lending available (the business cycle usually lasts about ten years in New Zealand), the time it will take to extract funds from KiwiSaver (usually but not always 10 working days) and the efficiency of the parties’ respective banks and lawyers.

Statutory Requirements

Until ownership of the property is transferred into the purchaser’s name, they are a tenant of the vendor, rather than a property owner. However, the Residential Tenancies Act does not apply. Therefore, the agreement will need to include provisions clarifying who is responsible for rates, utilities, maintenance (including broken glass and blown lightbulbs).

Furthermore, as the tenant is a purchaser in possession, the agreement has additional limitations on cancellation in the Property Law Act, including that the agreement is only terminated for breach and the purchaser must be given an opportunity to remedy that breach. Once the period for remedying the breach has expired, the vendor must apply for a court order to re-obtain possession (or must retake possession of the land without committing a crime, which is almost impossible).

Mortgagee consent

All mortgages contain a rule that the property cannot be sold without the consent of the mortgagee, usually a bank. Therefore, the vendor should notify their bank and give them an opportunity to consent to the mortgage before signing, to avoid a default.

Changing circumstances

As a lease to buy arrangement will usually last several years, the circumstances of the parties may change, for example, death, loss of mental capacity, serious illness, children, marriage, and divorce, all of which will affect the desirability of entering into the agreement. Therefore, the agreement should provide for these events, including whether the parties are able to terminate the agreement, or if the purchaser should be given an opportunity to bring forward the date on which ownership is transferred.

In terms of death and loss of mental capacity, the parties should also make wills and enduring powers of attorney, to simplify the process of dealing with these issues, both for the other party and for their own families. If either party is in a relationship, they should consider entering into an agreement contracting out of the Property (Relationships) Act 1976.

Return of money on termination

If the agreement is terminated, whether due to death or default of one of the parties, both parties should ensure that there are clear and fair rules around how the purchaser receives their money back.

Taxes

The Brightline Tax rules provide that a property is “sold” for Brightline purposes when an agreement to sell is made. Therefore, vendors must exercise caution when agreeing to sell the property to ensure that the property is outside the Brightline period (two years if the property was purchased after 15 October 2015, 5 years if the property was purchased after 1 April 2018).

This is a guest blog submission from APIA member Kristine King Guest submissions are a way for APIA members to share their views and experiences with each other and do not necessarily reflect the views and position of the APIA.  The content of this article is general in nature and not intended as a substitute for specific professional advice on any matters and should not be relied upon for that purpose.


ABOUT THE AUTHOR

Kristine King

Kristine is a Director of Duncan King Law and frequent content contributor for the APIA. Kristine works primarily in the areas of property, commercial law and trusts and has a passion for working with property developers and property traders. In addition to her legal work, Kristine is the Auckland area legal speaker for the ANZ Property Unlocked Seminar series and undertakes staff training on property issues for organisations such as ANZ and Bayleys. Kristine also provides specialist advice to the New Zealand Law Society on property matters during her work as a Standards Committee member.

 


 

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