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What is the situation if I “lend” my property to someone I know in exchange for a token monthly payment?

Published 03/07/2009

In this article, we will explain the legal aspect of this apparently innocent situation.

This is a question we are asked fairly frequently by clients wishing to “lend” their property, without a written rental agreement contract, for a small monthly reimbursement and on the understanding that the occupant can be instructed to vacate when the use of property is required again by the owner.

The idea is quite appealing - nothing formal or binding, just a verbal agreement between friends or acquaintances and a convenient way to generate some income to cover the property expenses during periods when it would otherwise be standing empty.

Now for the bad news. Just because there is no written agreement or contract, this does not mean that an agreement does not exist.

Furthermore, if the occupier has made the monthly payments by bank transfer this can be used to prove the existence of such an agreement. The consequence of this is that if the occupier has no desire to vacate the property when requested, he or she could claim that a verbal agreement exists and then use this to their own advantage.

Therefore the only way we can avoid creating a legally binding contract is if no conditions (payment, rental duration, usage of property etc) are stipulated or mentioned – even verbally!

The establishment of conditions converts this informal arrangement between the owner and the occupier into a formal rental agreement and to the position of Landlord and Tenant - and making the Law of Urban Rentals immediately applicable. This law concedes to the tenant the possibility to renew the annual agreement for five successive years and at the end of this term for a further three years if there are no further discussions between both parties. This illustrates how easily a property owner can enter into a loose “lending” type arrangement with a “friend” and suddenly find themselves lumbered with a long-term, unwanted tenant.

Any property owner finding themselves in this situation and wishing to evict the tenant and regain possession of the property would have no option other than to legally justify their right to cancel the agreement, quoting one or more of the reasons recognised by the above mentioned Law (expiration of the contract, failure to pay rent or a required deposit, damage to the property, subletting).  This is no easy task. 

Therefore we strongly recommend that, before “letting” a property, you decide  whether you intend to do this as a (not legally binding) “favour”, where you receive no financial  compensation, or as a rental contract with all its legal consequences. If you decide for the latter option, it is highly advisable to get legal advice from a specialist who can draft the contract with the exact and appropriate clauses for your individual situation.

Pablo Arteaga

Pablo Arteaga
Lawyer
lawyers@abacoadvisers.com



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