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September 11, 2019

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Rent-to-Own Scheme Exclusive to Dubai Freehold Area


- Saif-Al-Shamsi, Founder | Senior Partner, Head of Litigation [ The Legal Group ]

Saif-Al-Shamsi

The rent-to-own scheme gives an edge to developers by offering them the opportunity to sell their present properties instead of having them sit on the market, pulling down market prices, particularly when supply stays high and demand is restricted…

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 owning a property, by paying rent under the scheme, which will ultimately be converted to equity.

Article 513 of the Federal Law No. (5) of 1985 On the Civil Transactions Law of the United Arab Emirates 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 might be considered as the source of the rent-toown scheme concept which enables tenant to pay rent to the owner over a fixed timeframe. The tenant’s accumulated rent is transformed into equity subject to the tenant’s decision to buy the property after the lease expires.

As stated 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, which is generally 25% of the property value, in addition to 8% interest. Predominantly, 70% of Dubai’s population encounters this hindrance, since they lack 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 an 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 is high and demand is restricted.

rent-to-own

Likewise, the rent-to-own scheme offers numerous advantages to the buyers. In the form of monthly rents, down payments would be paid to the seller by the end of the contract. (It is important to mention that the buyer must expect additional fees to purchase the property).

Furthermore, the market frequently fluctuates, especially with Dubai Expo 2020 on the horizon, therefore, rent-toown is a good option to lock the price of a house.

Moreover, changing houses regularly is an unpleasant move. With the rent-to-own scheme, tenants can live in their home, before deciding to own it.

It is important to note that there are two types of rent-toown lease agreements. The lease option offers the right to purchase the property after 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 merely lose the option money without any obligation to buy.

The lease-purchase contract, on the other hand 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, irrespective of whether he can afford it or not.

The Dubai Land Department has developed a legal framework for these types of contracts and registration, with the issuance of a conditional title deed.

The Dubai Land Department has also regulated the fees to register 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 as Knowledge fee and Registration fees that amount to AED 4,000 for properties equal to or exceeding AED 500K and AED 2,000 for properties priced at less than AED 500K.

It is important to stay mindful of all terms and conditions in the contract to avoid misconceptions. For instance, it is necessary to check that the property value is what was agreed upon.

The number of years mentioned in the contract must be verified. It should be ensured that the total rent deducted would be from the purchase value or a percentage of it.

Some sellers refund a certain percentage of the down payment and so it must be checked if it is refundable or not. Last, but not least, the exit terms and conditions must also be verified.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.

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