Many individuals may not be able to afford to purchase movable property in cash or on credit (through getting a loan). A Rent to Own Agreement (“Agreement”) can be useful for such individuals. The Agreement will allow one person (“Renter”) to rent something from another person (“Owner”) and to have full use of the property with the intention to become the Owner of the property at the end of the duration of the Agreement (through instalment payments).
The following scenario and questions will help with understanding the Agreement, of which a template is available on our website.
Jordan and Nate enter into a rent to own agreement, whereby Jordan (Renter) will rent Nate’s (Owner) generator (movable property). Nate will hand over the generator to Jordan once they have both signed the agreement. They agree that Jordan will pay a deposit of R5 000 and then make monthly payments of R2 000 for the next 12 months. Once the payments are completed, Jordan will become the owner of the generator.
When will ownership be transferred?
- Although the Renter will receive possession of the generator and will be able to use it, s/he will not immediately become the owner.
- Ownership will remain with the Owner until the Renter made all payments and all the terms and conditions of the agreement have been fulfilled.
- If the movable property under the Agreement must be registered in the new owner’s name, it is important to do that (for example, transfer of ownership in respect of a motor vehicle).
Can the property be sold to someone else?
- As a general rule, the Renter’s rights in respect of the property shall be restricted until the full purchase price has been paid and/or the terms and conditions of the agreement have been fulfilled.
- This means that Jordan may not sell the generator to a third party for the duration of the agreement as he is not the owner yet. Once he has complied with all the terms and conditions of the agreement and paid the full purchase price, he will become the owner and can sell or rent the generator to a third party.
Will the payments go towards the purchase price?
- In this particular Agreement, the full monthly payments are taken as rent and a contribution to the purchase price. However, it is possible for only part of the rent to go towards the purchase price if the parties agree to it.
- This Agreement provides protection if the Renter cannot afford to continue with the agreement as the property will be returned to the Owner, who will be allowed to retain the payments already made by the Renter.
- On the one hand, the Owner would not lose anything as s/he would have received payment for the period the property was used by the Renter.
- On the other hand, the Renter can return the property to the Owner without having to pay any further amounts, except for possible damages to the property.
- For example, if Jordan is unable to make payments to Nate after six months, he will have to return the generator to Nate and Nate will retain all payments received by Jordan.
Who will take responsibility of the property?
- Generally, risk towards the property will be placed with the Renter. This means that Jordan will be responsible for the loss of the generator, as well as maintenance and repairs.
- In practice, the Owner has assurance that the Renter will treat the property with great care as s/he would be renting it with the eventual purpose of owning it.
- However, it is in the best interests of both parties that the Renter insures the property for the duration of the Agreement.
Will the owner give any warrantees over the property?
As a general rule, no further guarantee or warranty will be provided by the Owner.
Upon the Owner handing over the property to the Renter, both parties must ensure that the property is thoroughly inspected and the condition of the property is acknowledged by both parties.
If there are any guarantees and warranties over the property that were provided by the manufacturer, the Owner must inform the Renter about them and provide the necessary details.
As with any agreement, it is best that all the terms and conditions are reduced to writing and acknowledged by both parties. The terms and conditions can be amended to suit the needs of the parties entering into the Agreement and it is advisable to seek legal advice on completion of the Agreement.