Question : What is the ruling of rental that ends in ownership?

Fatwa in Brief: This is not permitted. This is because they are two contracts on the same thing, which is not settled on either of the two, because they have different stipulations.

Hay’ah Kibar Al-‘Ulama, al-Dawah Journal, 1421/01/22

Response:

Ownership after rental is a process consisting of a number of [mini-]transactions: agency, renting, promising to sell, and then, eventually, the sale or partnership. All of these [mini-]transactions are permitted. And the same applies when they are combined to form a major transaction [i.e. ownership after a period of renting]. This is providing all the conditions that make a contract valid remain in place.

Commentary:

Ownership after rental is a transaction based on two contracts: [first] rent followed by [second] sale. Indeed, it can be based on three contracts, whereby an agent is initially involved. Each of these [two or three] stages is permitted.[1]

We consider ownership after rental as a transaction that consists of a number of [mini-] transactions: agency, renting, promising to sell, and then sale or partnership. All of these [mini-]transactions are permitted. And the same applies when they are combined to form a major transaction [i.e. ownership after a period of renting], providing that the conditions that render a contract valid remains in tact.

Such conditions include the following:

1.  There is a promise from the side of the financer (bank) to rent to the customer after the financer owns the item.

2.  The financer is authorized by the customer to buy whatever he needs with the intention of then renting it to him (the customer). This authorization is permitted according to the law.

3.  It is preferred that renting takes place immediately after the property is purchased by the financer. However, as the financer must first complete the [necessary paper work for a] contract before s/he buys the item, this matter often takes time. Here, s/he must be careful so as not to rent out something that s/he does not yet own. For this is prohibited on the basis of a Prophetic hadith attributed to Ibn Hazm. In this, the Prophet (upon him be peace) said: “Do not sell something which you do not own”.[2] This hadith pertains to selling before ownership, and not to renting. This is because the customer will not pay anything until s/he has received the actual item and starts benefiting from it. After all, renting grants benefit rather than ownership. The harm that the Prophet (upon him be peace) forbid, as regards selling, is which is not owned and is erased.[3]

4.  Promising the sale of an item, or giving it as a gift or partnership after renting, is permitted when this involves separate contracts.

5.  The responsibility for the rented item is upon the owner, not the tenant. If the condition is different from this, the contract it is not valid. Any damage done must be covered by the financer (bank), except if it is the fault of the tenant who, in that case, must pay. Of course, where ownership follows renting, the tenant takes the responsibility from the financer.

6.  The tenant must strive to protect the rented item, and must use it for appropriate purposes. S/he cannot change any part of the item without the permission of the owner.

And all of the above agrees with the rule of renting in Islamic law.

And God knows best.

Dr. Anas Abu Shadi