Lease Purchase Option - Halal?

Lease Purchase Options

There is a way to take control of a property (owned by somebody else) and then sell that property for a profit without actually owning it. This is done with a contract known as a lease purchase option. Once the lease option has been signed, the seller cannot sell it to anyone else until the option expires on a certain date.

Instead of buying a property outright, Zayd (the investor) can approach Bakr (the seller) and sign an agreement with him. Zayd can also pay Bakr a nominal fee to agree to this agreement. This fee can be one-off or monthly fee (depending on the type of agreement made).

This agreement would allow Zayd to take control of Bakr’s property (as a lease, without owning it) for a set period of time.
During that time, Zayd could rent out the property or make changes to it or even exercise his right to buy the house himself (as per the agreement).

This agreement is called a Lease Purchase Option (or property option), and since Zayd has control of the property, he can even sell this agreement (the control) on to someone else so that a third party can buy the house instead.
He can either sell the agreement itself (for a sum like £5000) or he can sell the house at a higher price than the seller wants for it and pocket the difference. These are the two ways Zayd can profit from a Lease Purchase Option agreement.

This way, an entrepreneur like Zayd can continue taking control of houses and selling these lease purchase options to third parties for a profit.

Example: Zayd may have agreed (on the Lease Purchase Option contract) that if he exercises his right to buy the house at a later date, he (or the new lease option owner if he hands it to someone else) will pay £100,000 for it.
So now, once the agreement has been agreed upon, Zayd can take the ‘lease purchase option’ agreement to someone he knows who is looking to buy a house and sell him the lease purchase option agreement for £5000. The third party would take control of the property with the lease option (which is now his) and then exercise his right to buy for £100,000.

Or, Zayd can approach a third party and say “I’ll sell you this house for £110,000”. If the third party accepts, then Zayd just made £10,000 because Bakr only wants £100,000 for his house.

These are two ways to make a profit with lease purchase options.

Is there any aspect to this which does not fit in-line with the shariah?

If so, is there a way to do it without compromising the fiqh in this?

1 Like

As-salamu 'Alaykum,

I have a very similar question but could not find a direct answer yet. It is not easy to find the right competences for this.

However, in my search I was directed to the 4 basic general principles that are applicable to Islamic Contracts that state the following (very briefly):

1) One cannot combine a loan with a sale.
2) On the Conditions stipulated in a contract.
One cannot include just any type of condition in a contract. There are different positions among the different schools on this. Which type of conditions are allowed or not, which ones invalidate the contract, etc.

3) One cannot sell something that is not under his ownership.
4) One cannot extract benefits from goods for which he does not carry the risk.

It is mainly the 2 last principles that could potentially pose a problem.
For principle 3, one could argue that the sale of the good (real estate or other) is sold in collaboration with the owner. In such a case it could be possible to sell the good for someone else.

But, in my humble opinion, principle 4 is more problematic because the option buyer expects exactly to benefit from the good for which he does not bear any risk. If during the sale period the building burns down, it is the owner who is facing the risk and not the option taker.

I suppose that to make this contract valid, the option taker should assume some level of risk for the goods, in accordance with the level of the expected benefits. How to turn that into a contract is another question…

I agree that this needs more research and a more thorough analysis opinion from someone who is more competent (than I am) in Islamic Finance and Contracts.

I will keep searching for answers, but I am very cautious about engaging in such a contract (and having the intention of reselling the option)…

Please share your thoughts on this as well.

Wa Allahou a’lam

@Mufti_Faraz_Adam @Mufti_Billal

Any insight into these lease options?