Rent-to-own (RTO) arrangements, also known as lease-purchase or lease-to-own agreements, have become one of the most popular alternative homeownership vehicles in the Philippines, especially for middle-income and lower-middle-income families who cannot immediately qualify for traditional bank financing or Pag-IBIG housing loans. These contracts combine elements of a lease agreement and a conditional sale, allowing the lessee-buyer to occupy the property while paying monthly amounts that partially or fully credit toward the eventual purchase price.

While there is no single dedicated “Rent-to-Own Act” in the Philippines as of December 2025, these contracts are perfectly valid and enforceable under the general provisions of the Civil Code, jurisprudence, subsidiary regulations of the Department of Human Settlements and Urban Development (DHSUD, formerly HLURB), the Consumer Act (R.A. 7394), the Truth in Lending Act (R.A. 3765), and, in certain cases, the Maceda Law (R.A. 6552).

This article exhaustively covers everything a practitioner must know when drafting, reviewing, or litigating rent-to-own contracts in the Philippine context.

Legal Nature of the Contract

A rent-to-own contract is a bilateral, consensual, nominate or innominate contract that contains:

A contract of lease (Articles 1643–1688, Civil Code)
An option contract to purchase (Articles 1324, 1479, Civil Code)
Usually a unilateral promise to sell or a conditional contract to sell

The Supreme Court has consistently ruled that the true nature of the contract is determined by the intention of the parties and the stipulations, not by the title used (Pag-IBIG Fund v. Sps. Huang, G.R. No. 246834, 2021; Sps. Reyes v. Sps. Salvador, G.R. No. 207947, 2015).

If the contract clearly shows that monthly payments are intended to build equity and lead to ownership upon completion, courts will treat it as a contract to sell on installments even if labeled “rent-to-own.” This triggers the application of the Maceda Law (R.A. 6552) once the buyer has paid at least two years of installments.

When Maceda Law (R.A. 6552) Applies

Maceda Law applies when:

The transaction involves residential realty
Sold on installment basis
The buyer has paid at least two (2) years of installments

Supreme Court rulings (Active Realty v. Daracan, G.R. No. 210504, 2019; Pag-IBIG Fund v. Sps. Ramos, G.R. No. 247569, 2022) have repeatedly held that rent-to-own contracts where a portion (or all) of the “rent” is credited to the purchase price are installment sales governed by R.A. 6552.

Consequences if Maceda applies:

Buyer who has paid ≥2 years may avail of the 50% cash surrender value of payments (exclusive of option money and deposits)
Grace period of 1 month per year of installment payments paid
Notarial cancellation required before forfeiture
Automatic interest at legal rate on refunds if not paid within specified period

Drafting tip: If the seller wants to avoid Maceda Law, the contract must clearly state that no portion of the monthly rent is credited to the purchase price and that the option is purely gratuitous or supported by separate option money. However, this structure is rarely used because it defeats the main attraction of rent-to-own for buyers.

Essential Requisites and Mandatory Clauses

A well-drafted rent-to-own contract must contain the following:

Full identification of parties (including spouses if married; otherwise voidable under Family Code)
Accurate technical description of the property (TCT/OCT number, lot area, improvements, exact location)
Total contract price / purchase price (clearly stated in words and figures)
Monthly rental amount and explicit breakdown:
Example: “Monthly rental: ₱25,000.00, of which ₱15,000.00 shall be considered advance payment on the purchase price and ₱10,000.00 as pure rental for use and occupancy.”
Option period (usually coterminous with lease term, e.g., 3–10 years)
Option money or reservation fee (if any) – this is not refundable and is separate from credited rentals
Clear mechanism for exercise of option (notarial notice recommended)
Balance payment upon exercise (how, when, where)
Delivery of title (clean TCT free from liens upon full payment)
Default clauses (distinguish between lease default and purchase default)
Non-forfeiture clause if Maceda applies (mandatory refund provisions)
Add-on interest disclosure compliant with Truth in Lending Act (total finance charges, effective interest rate)
Real estate tax, association dues, utilities allocation during lease period
Maintenance and repairs (usually buyer’s responsibility from turnover)
Insurance (who procures fire/earthquake insurance)
Sublease and assignment prohibition
Venue of actions (usually courts of city/municipality where property is located)
Special power of attorney (if seller will sign Deed of Absolute Sale in advance, to be held in escrow)

Recommended Structure (Standard Template Outline)

I. Recitals
II. Lease of Premises
III. Monthly Payments and Credit to Purchase Price
IV. Option to Purchase
V. Exercise of Option and Execution of Deed of Absolute Sale
VI. Balance Payment and Delivery of Title
VII. Default and Remedies
VIII. Application of R.A. 6552 (Maceda Law)
IX. Warranties of Seller (clean title, no liens, subdivision approval if applicable)
X. Truth in Lending Disclosure Statement (attached as Annex “A”)
XI. Governing Law and Venue
XII. Entire Agreement Clause
XIII. Severability
XIV. Notarization

Tax Implications

Documentary Stamp Tax (DST)
- On the Deed of Absolute Sale: 1.5% of purchase price or zonal value, whichever is higher
- On the rent-to-own contract itself: if considered a contract to sell, DST is ₱15.00 base + ₱15.00 per ₱1,000 above ₱2,000 (but BIR often treats it as lease + option)
Value-Added Tax (VAT)
- Sale of residential lot ≤ ₱3.6M (2025 threshold) or house & lot ≤ ₱4.5M is VAT-exempt
- Above threshold: 12% VAT on gross selling price
Capital Gains Tax (6% of selling price or zonal value, whichever higher) – paid by seller
Creditable Withholding Tax on seller if not habitual
Real Property Tax during lease period – usually shouldered by lessee-buyer

DHSUD Registration Requirements (for Developers)

If the seller is a subdivision developer or offers multiple rent-to-own units:

Must have License to Sell (LS) or Certificate of Registration from DHSUD
Contract must be approved/annotated by DHSUD
Buyer entitled to copy of LS and approved contract format
Violation = administrative fines and possible criminal liability under P.D. 957

Common Invalid or Unenforceable Provisions (Avoid These)

Automatic forfeiture of all payments without judicial action (violates Maceda Law)
Excessive penalties (> legal interest rate)
Unconscionable add-on interest rates (courts reduce to 12% p.a.)
Waiver of Maceda Law rights (void as against public policy)
Clause allowing seller to unilaterally increase monthly payments without objective basis
“No refund” clause on credited rentals when Maceda clearly applies

Best Practices for Buyer Protection

Require escrow arrangement for the signed Deed of Absolute Sale and new TCT
Annotate the rent-to-own contract on the title (highly recommended)
Secure Pag-IBIG or bank take-out commitment if possible
Include material adverse change clause allowing buyer to exit with full refund of credited amounts
Require seller to deliver property with occupancy permit and real property tax clearance

Best Practices for Seller Protection

Require substantial option money (5–10% of purchase price, non-refundable)
Clear non-credit of pure rental portion
Require post-dated checks covering entire term
Include acceleration clause upon default
Require buyer to shoulder all transfer taxes and expenses
Stipulate that time is of the essence

Supreme Court Jurisprudence Highlights (Key Cases)

Pag-IBIG Fund v. Sps. Huang (G.R. No. 246834, 2021) – Rent-to-own contracts with credit of monthly payments to purchase price are contracts to sell governed by Maceda Law.
Sps. Reyes v. Sps. Salvador (G.R. No. 207947, 2015) – Label “lease with option to buy” does not prevent application of Maceda Law if substance shows installment sale.
Active Realty v. Daracan (G.R. No. 210504, 2019) – Buyer entitled to 50% refund even if contract contains “non-refundable” clause when Maceda applies.
Boston Bank v. Manalo (G.R. No. 158149, 2008) – Annotation of option contract on title protects buyer against third parties.

Conclusion

Rent-to-own contracts remain one of the most powerful tools for affordable homeownership in the Philippines, but they are also among the most litigated real estate contracts due to conflicting interests and unclear drafting.

The golden rule is simple: draft with absolute clarity on whether monthly payments build equity, explicitly acknowledge or exclude Maceda Law applicability, and always prioritize full disclosure.

A properly drafted rent-to-own contract that respects consumer protection laws while protecting the seller’s interests will almost never reach the courts — and when it does, it will almost certainly be upheld.