Rent-to-buy agreements are an increasingly popular way of buying residential properties in South Africa.
Given the robustness of South Africa’s commercial property market, it stands to reason that rent-to-buy agreements will play an increasingly significant role in commercial and industrial property purchases as well.
Rent-to-buy defined
Rent-to-buy agreements give tenants the best of both worlds: all the freedom of choice and all the opportunity that comes with buying a property. In a nutshell, it is an agreement in which a tenant rents a property and has the option to buy the property at the end of an agreed period. While it is an unconventional route to property ownership, it can be extremely helpful for buyers who need time to save up a deposit – which is typically a sizeable sum in the case of commercial and industrial properties.
Advantages of rent-to-buy agreements for buyers
A rent-to-buy agreement can solve one of the biggest problems for start-ups and small businesses: getting your foot in the real estate door and getting to move out from your garage or cramped home office. It gives you the ability, for a defined period of time, to save up to make a real estate investment while actively growing your business in premises that you intend to stay in for the medium to long term.
In other words, it creates options for new and small business owners, particularly those who aren’t sure how rapidly their operations will expand. At the end of the period, you’ll get to decide whether you want to buy or continue leasing. It also gives you an opportunity to “try before you buy” in order to make sure that the building is well suited to your needs – and that it’s in the right location.
Factors about rent-to-buy agreements that sellers/landlords should keep in mind
If you are renting a commercial or industrial property to a tenant in the usual manner, one of the risks that you run is that they don’t look after your property as well as they would their own. However, if your tenant is working towards having the property become theirs one day, then they are far more like to treat it with the same respect that you would.
As a seller, it’s important to not get a false sense of security in the “knowledge” that you have a buyer for the long term. The tenant can still choose to terminate the agreement. There is also the risk that the tenant/buyer may not be able to obtain a commercial property loan when needed.
Things to think about before signing a rent-to-buy agreement
If you’re the prospective buyer, you’ll need to carry out your due diligence and get a commercial building inspection done so that you’re aware of any pitfalls of the property. You should also ensure that the seller has a good reputation and is in a financially stable situation.
Frequently asked questions about rent-to-buy agreements
1. Is rent-to-buy legal in South Africa?
Rent-to-buy agreements are gaining traction in South Africa’s residential property market. These agreements are simply leases with a purchase clause built in that gives you the right to buy the property at the end of your lease period.
2. How do you draft a rent-to-buy contract?
Have a trusted property practitioner draw up this agreement for you. He or she will then handle the sale for you if the tenant decides to buy the property at the end of the lease period.
3. How can I get out of a commercial lease agreement in South Africa?
In terms of South African law, this will depend on the wording of the lease agreement and its provisions. An important factor will be whether the tenant is a natural person or an entity. It’s always advisable to get legal advice based on your individual circumstances before you try to terminate a commercial lease agreement.
As a real estate agency pushing the boundaries and remaining on the cutting edge of the industry, Seeff has its finger on the pulse of rent-to-buy agreements. Contact us for more information.
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