Introducing the Italian rent to buy scheme
In September 2014, the Italian parliament introduced measures to revitalise the property real estate sector. Measures include an Italian rent to buy scheme as part of the Sblocca Italia – Unlock Italy – decree (Article 23 of Legislative Decree 133/2014).
The Italian rent to buy scheme has two main aims. Firstly to help people purchase a property and secondly to support builders and developers sell property stock.
The Italian rent to buy scheme is similar to the UK model
It allows a promissory purchaser to immediately start living in a property as a tenant and provides the option to purchase the property at a later date.
As a tenant, the promissory purchaser pays a regular rent. In effect, this postpones the purchase of the property until a specified future date. Purchase should take place no more than 10 years from the start of the rent to buy contract. Rental payments reduce the overall property price.
Decree 133/2014 addresses and resolves problems that stemmed from the lack of specific legislation in this domain. Notably, the decree provides for the legal transcription of a rent to buy contract in the land registry for the duration of the contract.
Essentially, the land registry transcription counts as a full and proper reservation of the purchase of the property. Consequently, the owner of the property cannot sell it to anyone else for the duration of the contract.
No mortgages or easements or any other prejudicial rights can be held on the property. Creditors of the property owner / vendor will neither be able to register a mortgage on the property, nor foreclose on it.
As soon as a rent to buy contract is in the land registry, this guarantees that the property is reserved for the promissory purchaser. Any other transcription or registration will be unenforceable against it.
Frequently asked questions about the Italian rent to buy scheme
What is a rent to buy contract?
The contract 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 rent. After a contractually agreed period of time, but not more than 10 years, the promissory purchaser may decide to buy the property. The owner must deduct rent paid during the term of the rent to buy contract.
Example: Consider the sale of a villa for €100,000. The monthly rent is €1,000 per calendar month. A part of this rental payment, €500, is the rent payment for living in the property, as if it were a normal rent. The remaining €500, counts toward the purchase of the property. In effect, this portion of the monthly rent constitutes a down payment on the sales 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 €100,000, the promissory purchaser pays the outstanding EUR 70,000. This is because €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 an option to buy the property. However, there is no obligation. Obviously the parties may agree that the tenant must purchase, but that contract would not be subject to rent to buy legislation. It is merely a private arrangement.
How long does a rent to buy contract last?
The parties to the rent to buy contract establish the period within which the tenant may decide to buy the property. According to legislation, this 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. Firstly, a tenant may decide not to buy the property. In this case, however, the owner can retain part or all of the rent payments. These 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 causes significant damage to the property. This may mean the property owner has to go to court to evict the promissory purchaser, regain possession of the and free the property from contractual obligations in order to sell it to others.
What does an eviction order entail in terms of time and cost?
The procedure is not strictly-speaking an eviction, but the release of a property. Generally, this is a much shorter and less costly process. Just how long the release of a property takes very much depends on individual courts.
In order to use a property release procedure, the rent to buy contract must contain legally compliant and watertight clauses. You should always 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 payments are higher than a normal rent contract. In the event that the sale does not conclude, the retainer payment that the property owner retains serves as compensation.
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 an Italian rent to buy contract in the land registry. In the same way a deed of sale is managed. A notary – an official of the Italian State – must oversee the rent to buy contractual process. The contract must be legally compliant. The transcription in the land registry guarantees that the promissory purchaser has agreed 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 land registry transcription is valid for a maximum term of 10 years.
This protection holds 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. This includes 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 are applicable to buildings under construction. For contractual purposes, any pre-existing mortgage on the construction must be repaid. 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 into administration?
No. The buy to rent contract continues even if the property vendor / owner is declared bankrupt. So long as there is a price agreement in the rent to buy contract and the property is the main residence of the promissory purchaser or close relatives, the owner / vendor’s insolvency will not impact the sale.
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?
Tax depends on 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 Italain rent contract, tax related to the property ownership is borne by the vendor / owner.
The promissory purchaser pays costs pertaining to the transcription of the contract in the land registry. And, where applicable, the promissory purchaser is liable for any subsequent costs, expenses and tax liabilities and/or costs associated with completion of the property sale.
For tax calculation purposes, each rent to buy contract requires case by case assessment regarding advantages and/or disadvantages. This is another reason to involve an independent professional from the outset when considering a rent to buy scheme in Italy.
If you do not find your question relating to the Italian rent to buy scheme here, please contact us and we will be happy to answer it for you.
At De Tullio Law Firm, we specialise in Italian and cross border legal matters. If you are buying any type of property anywhere in Italy and you need advice or you would like to discuss your purchase, please get in touch with us. We are here to help.