How does rent-to-own work in Saudi Arabia?

The lessor in a finance lease is a joint-stock company licensed to carry out finance leasing, including commercial banks (Article 1 of the Law and of its Regulation), and no one may carry on finance activities without a licence (Article 4 of the Finance Companies Control Law). When the purpose is for an individual to own a home, the contract is also subject to the Real Estate Finance Law and its regulation (Article 31 of the Regulation), so SAMA’s home-finance limits apply to it.

The register is owned by SAMA and run by one or more registration companies licensed by SAMA (Article 18 of the Law). A SAMA circular required banks and finance companies to register finance lease contracts with the Saudi Company for Leasing Contract Registration (Sajil) from 1 July 2019, and concerned parties may obtain a certified copy of the entry.

Rules set by the Law include:

The lessee may take early ownership at any time by paying the remaining instalments without the profit (term cost) for the remaining period; the lessor may claim reinvestment cost of no more than the term cost for the next three months, plus non-recoverable third-party costs. For real estate, a contract may bar early ownership for up to two years from signing in exchange for a lower term cost (Article 11 of the Regulation). Under the model contract, if the lessee asks for early ownership before the end of the second year, the lessor may also claim the remaining instalments of those two years, including their term cost.

Since 24 February 2020, SAMA has required real estate financiers to use a model Ijara contract for individuals. Under it, the lessee is in breach after refusing to pay 3 consecutive monthly instalments, or after paying 5 separate instalments 7 or more business days late in each 5 years of the term; late fees and collection charges are capped at one instalment for the whole financing term; and a default notice must give the lessee at least 10 business days from receipt to cure.

If the contract is terminated, the lessee can be evicted only by order of the competent judicial authority, unless both sides agree in writing after the default and termination, and eviction may not be forced by cutting off electricity or water (model contract clause 32-3). The lessee may recover the value of the right to own for the period paid (Article 9(2) of the Regulation); the model contract defines it as the unused part of the advance rent payment plus any amount by which the property’s sale price exceeds the early-ownership amount owed to the lessor, and if the price falls short, the lessee owes the difference.

The Law allows several ways to pass ownership, including a condition tied to paying the instalments, a promise to sell at a token or agreed price, or a gift, subject to the rules on property ownership by non-Saudis (Article 2). Under the model contract, the lessor signs the ownership transfer certificate within 5 business days of full payment and completes the official transfer within 15 business days of signing it unless prevented by a cause beyond its control, while the lessee pays the government fees for the transfer.

Real Estate Transaction Tax (5%) is charged once, on the financier’s purchase of the property from its owner, and is not charged again when ownership passes to the customer under the same contract with no change in the property’s description or value, according to ZATCA’s detailed guideline.