While a number of rent-to-buy websites respond “yes”, this question could refer to any one of many different transactions. The term “rent to buy” is used for various combinations and structures of contracts including options to purchase, tenancy agreements, terms sales and joint venture agreements. The transactions can involve intermediaries playing various roles, and use “innovative” marketing and persuasive selling techniques.
A number of legal cases show that when rent-to-buy matters come before courts or tribunals, decisions may be made about whether parties have appropriate credit and estate agent licences, whether advertising and representations breach the Australian Consumer law, whether an individual contract is unjust as a result of the facts surrounding the agreement, about the validity of the written contract and whether a owner must pay interest on option payments made by the ‘buyer’. (See links page for some more cases)
It is also worth noting that courts and tribunals sometimes find that despite a contract being drafted as one type of agreement it is, in fact, a different type of agreement. Just to illustrate this point, in a case unrelated to rent to buy the Queensland Civil and Administrative Tribunal found that contracts for the sale and purchase of diamonds were in fact a loan contract regulated by the Consumer Credit Code [Carter and Anor v Fast Access Finance (Beaudesert) Pty Ltd and Anor  QCAT 525]. In relation to rent to buy, this means that just wording a contract as a “joint venture” or an “option to purchase” for example, doesn’t mean that a court won’t decide that the contract is actually something quite different.
Having contracts drafted by lawyers can reduce the likelihood that they will be found unenforceable or illegal, but many businesses have been prosecuted, or had consumer contracts overturned, even when their contracts were drafted by lawyers. This risk often increases when agreements are being drafted for transactions that are not in common usage, and therefore have not been fully tested in the courts. Arguing that a strategy was used 100 years ago may be of historical interest, but it means nothing about how the contracts interact with current laws.
But haven’t courts found that these transactions are legal?
Rick Otton claims that in the Susilo matter, the WA Supreme Court judge “agreed that all the strategies are legal”. It has also been claimed on a number of sites that the High Court accepted the “legality of both forms of vendor finance” in a 1927 taxation case. So is this correct?
Old English and Australian taxation cases clearly show that income from illegal earnings can be assessed as taxable income, so a finding that tax is payable doesn’t make the activity legal.
My legal colleagues tell me that it is a court’s role to determine the matter before it, and not to investigate or make findings in relation to matters which have not been put to the court for determination. On reading the decisions in both cases I can’t find any reference to the judges considering, or commenting on, the legality of the vendor terms/rent to buy contracts.
The 1927 case, Federal Commissioner of Taxation v Thorogood , raised a question of law arising from the taxation laws at the time, and the only legislative references are to the Income Tax Assessment Act 1922-1925.
Isaacs ACJ said “This appeal arises under s. 51 (6) of the Income Tax Assessment Act 1922-1925, and raises a question of law.” After briefly outlining how Mr. Thorogood made his money from property, he says “the facts are only necessary to be stated so far as they raise the question of law.” The key question the Court had to decide was the year in which various amounts of income were ‘derived’. It appears that the Court was interested solely in a question of law relating to the Tax Act.
The case shows that Mr Thorogood was engaged in selling property using vendor terms arrangements in 1927 – but High Court “acceptance” of vendor finance strategies? I don’t think so – but I would encourage you to read the decision yourself.
The more recent Susilo case (see my post here) was brought by the Department of Commerce in Western Australia (DCWA). The Susilos were fined by the Supreme Court after admitting they engaged in misleading and deceptive conduct in relation to rent-to-buy operations, and operating as a real estate agent without a licence. In its decision the Court outlines the various types of arrangements entered into by the Susilos, describing an ‘option rent to buy’ and a ‘joint venture rent to buy’. Again, there doesn’t appear to be any reference in the Court’s decision regarding the legality, or otherwise, of the transactions. I suppose it could be argued that in failing to argue that the contracts were “illegal” the DCWA accepted they were “legal”, however I don’t think this holds up. Regulators can generally only act where there is a breach of legislation – not when a contract is simply not legally binding. Therefore, it is often the case that a consumer can successfully challenge a contract in court, but that the same law isn’t available to the regulator – that is, some legal arguments are only available to a party to the agreement. So, despite the fact that DCWA was silent on the whether these contracts were legal or binding, and despite the court and DCWA accepting an undertaking that included reference to rent to buy transactions, this is a far cry from the court agreeing that “all strategies are legal”.
Asking whether “rent to buy” is legal is a like asking whether “car finance” is legal. Of course, this would depend on a wide range of factors including the wording of the contract, application of licensing requirements and specific motor vehicle legislation, state and federal consumer laws, the role of any intermediaries and whether particular arrangements are unconscionable.
So, “is rent to buy legal?” I doubt any lawyer could answer this question without being presented with a specific contract and the specific circumstances. Surprisingly, there are some simplistic answers out there, supported by some pretty shaky arguments.