To buy or lease: That is the question
Borrowing from Shakespeare’s Hamlet, To lease or to buy: that is the question. Whether ‘tis nobler in the mind to suffer the slings and arrows of outrageous rentals, escalation and landlords, or to take arms against a sea of troubles, and by opposing end them by buying your own property. The question on whether a person should lease or buy real property is common. The primary consideration for most is the cost and benefit of either. It would also be helpful to aid a prospective property lessor or buyer to know the basic legal principles and distinction between these two special contracts.
In a contract of lease of things, one of the parties binds himself to give to another the enjoyment or use of a thing for a price certain, and for a period which may be definite or indefinite. However, no lease for more than ninety-nine years shall be valid. A lessor retains ownership rights over the property. Possession, use and enjoyment of the property however are vested on the lessee for the duration of the lease period. What kind of real properties may leased? Alienable lands (agricultural lands), private lands and/or improvements thereof, condominium units, buildings, are among the properties that may be the subject of a contract of lease.
The parties to a lease are the lessor and the lessee. The lessor is obliged to 1) deliver the thing which is the object of the lease; 2) to make necessary repairs during the lease to keep the thing suitable for use, unless a contrary agreement is stipulated; and 3) to maintain the lessee in the peaceful and adequate enjoyment of the lease for the duration of the contract. The lessor is also not allowed to alter the form of the thing leased in such a way as to impair the use of the thing.
The lessee on the other hand is obliged to 1) pay for the lease price; 2) to use the thing as a diligent father of a family, devoting it to the use stipulated; and in the absence of a stipulation, to that which may be inferred from the nature of the thing leased, according to the custom of the place; and 3) to pay the expenses for the deed of lease.
As a rule, the lessor is obliged to shoulder necessary repairs. The parties may agree however that the lessee shall shoulder these repairs. The lessee should advise the lessor within the shortest possible time if necessary repairs should be made. During the lease, in case of urgent repairs to the property, the lessee is obliged to tolerate the work despite it be annoying and although there will be a deprivation of a part of the premises. Urgent repairs should be the obligation of the lessor. If the lessor fails to repair, the lessee may order the repair at the lessor’s cost, sue for damages, suspend the payment of rent or ask for rescission of the contract.
Useful improvements made by the lessee in good faith which are suitable for the use of the property, without altering the form or substance of the property should be paid by the lessor to the lessee at the end of the lease period. The lessor should pay one-half of the value of the improvements at the time. If the lessor refuses to reimburse the amount, the lessee may remove the improvements, even if the property may suffer some damage due to the removal. The lessee should be careful to to cause more impairment than necessary to remove the improvements.
As regards ornamental expenses, the lessee shall not be entitled to reimbursement, but these may be removed, provided there be no damage to the property, and the lessor does not choose to retain them by paying their value at the time the lease is extinguished.
A lease made for a determinate time ceases on the day fixed, without need of a demand. If the lessee is allowed by the lessor to continue enjoying the property for more than fifteen days after a lease expires, it is understood there is an implied lease. The new period may be either year to year if annual; month to month, if monthly; week to week if weekly; and from day to day if rent is paid daily.
Now during the period of the lease, may a lessee assign a lease and sublease? As a general rule, the lessee cannot assign a lease without the consent of the lessor except where there is a stipulation to the contrary. The reason for the prohibition is because an assignment of a lease creates a novation where a substitute debtor steps into the lessee’s position. On the other hand, a sublease is a separate and distinct contract wherein the original lessee becomes a sublessor to a sublessee. In such an event, the sublessee is bound to the original lessor for all acts which refer to the use and preservation of the property leased as stipulated in the original lease.
Again, one of the key distinctions between a contract of lease and contract of sale is that ownership rights are retained by the lessor. The lessee then has limited rights as to disposition, use, improvements and alienation. The lessee has the right to possess, use and enjoy the property subject to these limits. Therefore, if one wishes to have absolute dominion over a property, he or she must consider acquiring the same by purchase or sale.
The law defines a sale as a contract whereby one of the contracting parties, the seller, obligates himself to transfer ownership of and to deliver a determinate thing to the other party, the buyer, and to pay a price certain in money or its equivalent. A sale may be absolute or conditional.
The essential elements of a contract of sale are 1) consent or the meeting of the minds of the parties to transfer ownership in exchange for the price; 2) a determinate subject matter, and 3) a price certain in money or its equivalent.
Ownership of the property is the basic end game from a buyer’s point of view. An owner has the right to enjoy and dispose of a thing, without other limitations than those established by law. A lessor, while having the right to enjoy the property, may not dispose of or sell the property because it is not his. An owner has the right to use and abuse his property in such any manner, provided it does not injure the rights of other persons.
One thing an owner and a lessee or lawful possessor has is that both have the right to exclude any person from enjoyment and disposal of the property. Further, they may use such force as may be reasonably necessary to repel or prevent an actual or threatened unlawful physical invasion or usurpation of his property. This is an exception to the general rule that no person should take the law into his own hands.
The ownership of property gives the right by accession to everything which is produced by the property or which is incorporated or attached to it, either naturally or artificially. A lessee has limited rights over the accessions to the leased property.
A sale involves the obligation to absolutely transfer title to or ownership of a property while a lease involves the use of the property for a lease price coupled with an obligation to return the property at the expiration of the term agreed upon. There are instances wherein a conditional sale is made by means of a “lease with option to buy”. The lease price is actually installment payments of the purchase price.
A contract of sale is also different from a contract to sell. The latter is an agreement between a seller and a buyer where the seller promises to sell and the buyer promises to buy the subject property. Ownership or title to the property is not transferred until upon the compliance with conditions set. This is common with the sale of real property from developers specially on installment. Possession may be turned over to the buyer but ownership is retained by the developer-seller. When all conditions are met, the parties shall execute the contract of sale. Only then shall title transfer to the buyer.
The most common practice now is the purchase of property on pre-selling and on installment basis. Note that such sale may be covered by R.A. No. 6552 or the “Realty Installment Buyer Act” or more popularly referred to as the “Maceda Law”. The law covers all transactions or contracts involving the sale or financing of real estate on installment payments including residential condominium apartments but excluding industrial lots, commercial buildings and sale to tenants under agrarian laws. The law allows for the defaulting buyer who has paid installments a grace period to pay before the cancellation of the sale.
The parties to a sale are the seller and the buyer. Either may be natural persons or juridical persons such as corporations, partnerships, and associations, that have a distinct personality from each shareholder, partner or member. It is important that the party entering into the contract are duly authorized to transact and bind the person they represent. Therefore, prudence would dictate that one requests for documentation of the authority to transact such as a power of attorney, a board resolution or partnership resolution.
Remember that whether you are a seller or a buyer, you want the sale to be consummated. It would be in the best interest of both parties to exert due diligence to achieve this goal. At this point however, let us focus on the things that a prospective buyer should include in a basic due diligence checklist.
- Check the Title.
Request for a certified true copy of the certificate of title from the seller or the representative. The title contains the name of the registered owner or owners of the property. See if that is the person you are dealing with. The title also indicates the technical description of the property. The title also indicates if there are encumbrances over the property such as an outstanding mortgage or easements. If there are annotations, the title is not “clean”.
- Ask for a Survey
Be certain of the subject matter of the sale. If it is a parcel of land, see if there is a lot plan. It would be best to have a survey of the property. If it is a condominium unit, request for a floor plan.
- Get the latest Tax Declaration and Tax Clearance
See if there are outstanding real property taxes. Note that there may be more than one Tax Declarations, one for the land and one for improvements. You may go to the local Municipal or City Assessor’s Office for these documents.
- Inspect the Property
Do an ocular inspection of the property. Take the time to visit the property and get a look and feel personally. Aside from finding out if the property is really for you, you may discover if there are occupants of the property, the neighbors, access to and from the property.
Check if there are utilities like electricity, water, telephone and internet available. Also see if there are existing accounts that may be transferred, cancelled or if there are outstanding accounts.
- Taxes and Fees
Determine the tax obligations due from the transaction. Note taxes to be paid such as documentary stamps tax and capital gains tax. Also check registration fees and notarization fees. These amounts may add on to cash a buyer has to shell out on top of the down payment and purchase price if buying on installment.
- Legal Representation
Engage the services of a real estate attorney to represent you. Sellers and their representatives may make it convenient to have their attorneys do the paperwork. NEVER agree to this. An attorney of your choice will protect your interest and safeguard your rights. Bring your attorney on board as soon as possible and not after concluding negotiations and worse, after signing documents. The key take away in this can be summed up in two words: DUE DILIGENCE. Whether you are opting for a lease or a sale, whether you are a seller or buyer, it is necessary to exercise due diligence in the transaction and documentation. The business of property is already expensive to begin with. Life savings may be put at risk if not done diligently. Avoid the inconvenience and risk of litigation by knowing the nature of the contracts you are entering into and the respective