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The Italian Rent to Buy scheme

Introduction of the Italian Rent to Buy scheme

rent to buyIn September 2014, the Italian parliament introduced measures to revitalise the property real estate sector. These measures include a rent to buy scheme as part of the Sblocca Italia – Unlock Italy – decree (Article 23 of Legislative Decree 133/2014).

With access to credit in Italy continuing to be tight, the rent to buy scheme has two main aims:

  1. to help people purchase a property and
  2. to support builders and developers sell unsold stock of property.

Based on the UK model, the Italian version of the rent to buy contract scheme offers a seamless operation whereby a promissory purchaser can immediately start living in a property as a tenant with the option to purchase the property at a later date.

As a tenant, the promissory purchaser pays a regular rent and, in effect, postpones the purchase of the property until a specified future date, which may not be more than 10 years from the start of the rent to buy contract. The payment of the property price is reduced by the whole or a part of the rent paid prior to the contractually stipulated date.

Decree 133/2014 addresses and resolves problems that stemmed from the lack of specific legislation in this domain. Notably, it has provided for the legal transcription of a rent to buy contract in the land registry for the duration of the rent to buy contract.

Essentially, the land registry transcription counts as a full and proper reservation of the purchase of the property. Consequently, the property cannot be sold to anyone else for the duration of the contract. A mortgage cannot be granted on the property, nor can an easement or any other prejudicial rights be created. Any creditors of the property owner / vendor will not be able to register a mortgage on the property pledged for sale, nor foreclose on it.

As soon as a rent to buy contract is transcribed in the land registry, the property is in effect guaranteed as reserved for the promissory purchaser and any other transcription or registration will be unenforceable against it.

Below, I have listed questions and answers about the Italian rent to buy scheme. If you do not find your question here, please contact us and we will be happy to answer it for you.

Frequently Asked Questions:

What is a rent to buy contract?

It is a contract which combines a rental contract and a preliminary contract of sale for a specific property. This means that from the outset of the contract, the owner/vendor gives the promissory purchaser the right to buy the property. The promissory purchaser is able to live, as a tenant, in the property and pays a regular, agreed rent. After a contractually agreed period of time, but not more than 10 years, the promissory purchaser may decide whether to buy the property and, a price deduction will be made on the purchase price based on rent paid during the term of the rent to buy contract.

Example: Consider the sale of a villa for EUR 100,000. The monthly rent is agreed at EUR 1,000 per calendar month. A part of this rental payment, for example EUR 500, is deemed as the rent payment for living in the property, as if it were a normal rent. The remainder, EUR 500, is counted towards the purchase of the property; i.e. in effect, this portion of the monthly rent constitutes a down payment on the sale price.  If the term of the rent to buy contract is 5 years and at that point, the promissory purchaser decides to buy the property, rather than pay EUR 100,000, the promissory purchaser pays an outstanding EUR 70,000 because

EUR 30,000 has already been paid as part of the rent to buy scheme.

Is the promissory purchaser obliged to buy the property at the end of the rent to buy contract?

The law provides for the option to buy property, but there is no obligation. Obviously the parties may agree that the tenant is obliged to purchase, but that contract would not be governed by rent to buy legislation.

What period of time are we talking about?

The period within which the tenant may decide to buy the property is established by the parties to the rent to buy contract, but it must be within 10 years from the start of the rent to buy contract.

What are the benefits of a rent to buy contract for property vendors?

The main advantage is the ability to find a larger number of potential buyers.

What are the risks of a rent to buy contract for property vendors?

There are a couple of risks.

One is that the tenant may decide not to buy the property. In this case, however, the owner can retain part or all of what has been paid, which should be a sum greater than a normal rental income.

The other risk is that the tenant doesn’t abide by contractual terms, becomes insolvent or substantially damages the property. This may mean the property owner has to go to court to get the promissory purchaser evicted, regain possession of the property and free the property from contractual obligations in order to sell it to others.

The owner / vendor, in the event of a failed purchase or non-payment of rent, may need to go to court to get an eviction order. What does that entail in terms of time and cost?

The procedure is not strictly-speaking an eviction, but the release of property: generally, a much shorter and less costly process. However, how long the release of a property takes very much depends on individual courts.

In order to be able to follow this procedure, legally compliant and watertight clauses in the rent to buy contract are required: you should seek independent legal advice in structuring the entire rent to buy contract. It is crucial to ensure that you cover everything.

Are there any measures in place to safeguard the owner /vendor?

It is imperative that the rent is higher than in a normal rent contract so that the portion that the property owner retains, in the event that the sale is not concluded at the end of the contractual term, serves as compensation for the property owner/vendor.

Commitment to retainer conditions also serves as an indication of the promissory purchaser’s commitment to conclude the transaction at term.

What protection does rent to buy provide for promissory purchasers?

The law provides for the transcription of the rent to buy contract in the land registry. Just as with a deed of sale, a public notary – an official of the Italian State –  needs to be involved in the process. A legally compliant, carefully drafted buy to rent contract and the transcription in the land registry guarantees that the promissory purchaser is agreeing to buy a property free of mortgages, liens, foreclosures, or any other detrimental matters, which might arise following the transcription of the rent to buy contract. The transcribed contract lasts for a maximum term of 10 years.

This protection is maintained even if the property vendor / owner is declared bankrupt during the term of the rent to buy contract.

What type of property can be included in rent to buy contracts?

Rent to buy contracts are valid for any type of property including but not limited to: apartments, houses, farms, garages, vineyards, shops, offices, factories, land.

Are rent to buy contracts also applicable to buildings under construction?

Yes. Rent to buy contracts can be applied to buildings under construction. For contractual purposes, any pre-existing mortgage on the construction should be cancelled. If after careful consideration and having taken independent advice, the promissory purchaser wishes to assume a pre-existing mortgage, it is however possible to provide a clause to that effect.

For building and development companies, rent to buy contracts can represent an interesting way to finance mortgage payments for property construction.

Regarding rent to buy contracts for buildings under construction, does the promissory purchaser lose money if the builder or developer goes in to administration?

No. The buy to rent contract continues even if the property vendor / owner is declared bankrupt. So long as the price has been agreed in the rent to buy contract and the property is the main residence of the promissory purchaser or close relatives, the sale will not be affected by the vendor / owner being declared bankrupt.

Can the promissory purchaser confer a power of attorney to sign the rent to buy contract?

Yes. Legislation provides the right to confer a power of attorney on a third party to sign the rent to buy contract, and the final deed of sale, where applicable, on the promissory purchaser’s behalf.

You should be extremely careful about who you chose for your power of attorney. You are delegating the management of your legal and financial affairs to someone else. Hence, it is extremely important that you entrust these matters to a reliable and competent person, preferably a professional. Appointing anyone who does not have enough experience or who has a vested interest is highly inadvisable.

What taxes are applicable with a rent to buy contract?

For tax purposes, consideration will be given to whether the owner / vendor of the property is a private individual or a company. Direct tax is chargeable to the owner / vendor and indirect tax is levied on the promissory purchaser.

As a rule of thumb, for the duration of the rent to buy contract, as with any rent contract, tax related to the property ownership is borne by the vendor / owner.

Costs pertaining to the transcription of the contract in the land registry are borne by the promissory purchaser. And, where applicable, the promissory purchaser is liable for any subsequent costs, expenses and tax liabilities incurred and or associated at completion of the property.

For tax calculation purposes, each rent to buy contract needs to be assessed case by case to assess advantages and or disadvantages. This is another reason to involve an independent professional from the outset when considering a rent to buy scheme.

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