Many people who rent the house they live in do not do so out of choice. They see rent as dead money and would prefer to own their home and pay their own mortgage rather than pay the landlord’s.

But high prices and in many cases student debt, mean that they cannot afford to buy a property they would want to live in. Either their salary is too low to cover the mortgage they would need, or they cannot get together enough cash to pay the deposit and transaction costs such as surveys and conveyancing fees.

But a new form of tenure is coming to the market, which enables tenants to get a toehold on the property ladder without buying their home. It is called a lease option. The arrangement is also attractive to buy-to-let landlords if they want long-term, reliable tenants and think they may want to sell a property in a few years.

A lease option contract typically lasts three to six years. The rent level is agreed in advance, though it may rise year by year. The tenant is responsible for some or all of the repairs and maintenance on the property.

The contract gives the tenant the right, but not the obligation, to buy the property at an agreed price in the future. For example, a new tenant who moves into a flat worth £200,000 in November 2006 may be given the option of buying it for £220,000 in November 2009.

For tenants, a lease option offers some insurance against property prices moving even further out of reach. In the above example, the tenant would be able to buy the property for £220,000 even if soaring house prices brought its market value up to £300,000. In the three years of paying rent, the tenant could put extra money to one side to save for a deposit when buying the property, and knowing the price would make financial planning easier.

Moreover, the tenant would avoid the manifold stresses and strains of buying a property on the open market, such as onward chains, gazumping and the cost of moving house. And the prospect of becoming the owner of the house may give a comforting feeling of stability.

However, the option is only valuable if prices have risen – if prices fall, the tenant will have lost out. A lease option also requires the tenant to stay in the property for several years to take advantage of the option, so it is not suitable unless you are sure you want to stay put.

Lease options are attractive to landlords because they give the tenant an incentive to look after the property and to stay for several years, thus avoiding costly “voids” when the property is empty. The price the landlord pays is sacrificing some of the potential gains from a rapid rise in the property’s value.

Lease options are already popular in the US. Justin Stewart, a British dentist who wanted to get into the property market, learned about them when he attended a seminar on property investments in the US.

He has provided backing for The Lease Option Company, which is targeting first-time buyers in the UK. It will do this through a combination of buying properties and marketing them as lease options, and inviting prospective tenants to find properties they would like to live in, which it would then buy and rent out to them.

Erinaceous Group, the Aim-listed provider of property services, last month bought Rent-2-Buy from Jordan’s, a Cheshire-based lettings agent. It plans to use it to launch a lease option service in November.

Rent-2-Buy offers a variation on the lease option model: the tenant is responsible for all maintenance costs and has the right to buy the property from the landlord after three years. The tenant receives a 6 per cent rebate on any increase in the property value for every year of tenancy, up to a maximum of 36 per cent after six years.

For example, suppose a tenant moves into a property worth £100,000. After three years, its value has risen by £50,000 to £150,000. The tenant has earned an 18 per cent rebate on the rise in value, so he can buy the property for £141,000 – i.e. £9,000 less than its market value.

Under the Rent-2-Buy contract, the landlord has the right to sell the property early and cancel the option, provided he gives financial compensation to the tenant.

However, this is only for “disaster situations such as the couple who own the property getting divorced,” according to Robert Jordan, founder and chairman of Jordan’s.

So far Rent-2-Buy has pushed through just a handful of transactions in Manchester and Liverpool. But Erinaceous has access to 6,000 letting agents nationwide and will be encouraging them to promote the scheme to landlords and tenants.

Andy Halstead, Erinaceous director, says: “If we get 10,000 to 20,000 [deals done] in the first year that would be very successful.”

www.theleaseoptioncompany.co.uk

www.rent-2-buy.co.uk