Stipulating the condition of comprehensive insurance in lease-to-own contracts

Question

Praise be to Allah.

Firstly:

The lease-to-own contract has
several forms, some of which are permissible and others are disallowed. One
of the permissible forms is that in which there are two separate contracts,
a lease or rental contract with a promise of selling, in which selling does
not take place except by means of a separate contract after the end of the
lease period, at which time each party is free to choose whether or not to
go ahead with this sale.

See the answer to question no.
14304

The Islamic Fiqh Council issued
a statement concerning this matter in its twelfth session held in Riyadh, 25
Jumada al-Aakhirah to 1 Rajab 1421 AH (23-28 September 2000 CE).

This statement was as follows:

Statement no. 110 (4/12) on the
topic of lease-to-own contracts.

The international Islamic Fiqh
Council belonging to the Organization of the Islamic Conference (OIC), in
its twelfth session in Riyadh, Kingdom of Saudi Arabia, 25 Jumada al-Aakhirah
to 1 Rajab 1421 AH (23-28 September 2000 CE).

After studying the research
papers presented to the council with regard to the topic of lease-to-own
contracts, and after listening to the discussion that took place on this
topic with the participation of members of the council, experts and a number
of fuqaha’, the council determined the following:

Lease-to-own contracts:

~1~

The guidelines on the
permissible and disallowed types of this transaction are as follows:

1.Guideline on types
that are disallowed: having two contracts at the same time regarding the
same item

2.Guidelines on
types that are permissible:

·Having two
separate contracts that are independent of one another in terms of time, as
the sale contract is drawn up after the end of the lease contract, or there
is a promise to sell the item at the end of the lease period. Promise and
choice are the same thing with regard to rulings.

·The lease should
be genuine, not a cover for selling.

3.Liability for the
leased item is borne by the lessor (the owner or dealer who leases the car
to the customer), not the lessee (the customer who leases the car from the
dealer). Thus the one who is leasing out the car is responsible for any
problems that arise with the item that do not result from mishandling or
negligence on the part of the lessee. The lessee is not obliged to pay
anything if he is no longer able to use the item.

4.If the contract
stipulates that the leased item must be insured, then insurance should be
cooperative and Islamic, not commercial, and it is the responsibility of the
owner and lessor, not the lessee.

5.What must be
applied to the lease-to-own contract is the rulings on renting and hiring,
throughout the period of the lease; the rulings on buying and selling apply
when the item is sold.

6.Maintenance costs
of the car, apart from running costs, are the responsibility of the lessor,
not the lessee, for the duration of the lease period.

~2~

Disallowed forms of the
lease-to-own contract include the following:

1.Lease-to-own
contract in which the leased item becomes the property of the lessee in
return for what he paid of money towards the lease during the stated period,
without drawing up a new contract, and the lease turns into a sale contract
automatically and the end of the lease period.

2.Leasing an item to
a person for a set fee and for a certain length of time, with a sale
contract which stipulates that all agreed leasing fees should be paid
throughout the stated period, or more time may be added to it in the
future.

3.A contract for
leasing in a true sense, but it includes a condition that the lessor may
choose to sell the item to the lessee, and the sale is deferred until the
end of the stated period (i.e., the end of the lease period).

This is what has been mentioned
in fatwas and statements issued by scholarly organisations such as the
Council of Senior Scholars in the Kingdom of Saudi Arabia.

~3~

Permissible forms of this
contract:

1.Lease contract in
which the lessee may benefit from the leased item in return for a specific
fee for the duration of a specific period, which is accompanied by another
contract giving the item for free to the lessee provided that he pays all
fees. That should be done in a separate contract, or a promise to give the
item after paying all leasing fees. (This is in accordance with what is
mentioned in a statement of the council with regard to gifts, no. 13/1/3
during its third session).

2.Lease contract
with the owner giving the lessee the choice, after paying all due
instalments throughout the lease period, of purchasing the leased item at
the market price at the end of the lease period. (This is in accordance with
the council’s statement no. 44 (6/5) during its fifth session.

3.Lease contract
that allows the lessee to use the leased item in return for a specific fee
for the duration of a specific period, accompanied by a promise to sell the
leased item to the lessee after payment of the lease in full, for a price to
be decided by both parties.

4.Lease contract
according to which the lessee may use the leased item in return for a
specific fee for the duration of a specific period, in which the lessor
gives the lessee the option of purchasing the leased item at any time, so
long as the sale at that time is done with a new contract, based on the
market price (which is in accordance with the council’s statement mentioned
above (44/6/5), or based on whatever they agree on at that time.

~4~

There are some forms of
lease-to-own contracts that are the subject of differences of scholarly
opinion. These need to be studied in a future session, in sha Allah. End
quote.

Secondly:

From the statements of the
council it is clear that if the contract includes insurance of the leased
item, then it must be cooperative, Islamic insurance, not commercial
insurance, and the cost thereof is to be borne by the owner and lessor, not
the lessee, regardless of whether the insurance is comprehensive or
partial.

The point is that it is not
permissible to force the lessee or purchaser to take out insurance on the
leased or purchased item. Rather this is to be done by the lessor, if he
wants that, because liability on the leased item is the responsibility of
the lessor, not of the lessee. The lessee is only liable in the case of
negligence or misuse.

If the lessor stipulates that
the lessee must insure the item, then this condition is invalid; it is like
stipulating that the lessee is liable, but does this render the contract
invalid or not?

It says in al-Mughni
(5/311):

If the lessor stipulates that
the lessee is liable for the item, then this stipulation is invalid, because
it is contrary to the nature of the contract. But does it invalidate the
rental contract? There are two scenarios, based on the conditions that
render a transaction invalid. Ahmad said: With regard to stipulating that
the user (lessee) is liable for the (leased) item, that is makrooh. Al-Athram
narrated, with his isnaad from Ibn ‘Umar, that he said: Rental with the
condition that (the user) is liable is not valid. It was narrated from the
fuqaha’ of Madinah that they used to say: We do not rent anything with the
stipulation that (the user) is liable. However, if you stipulate to the
lessee that he should not take the leased item to the bottom of a valley, or
take it by night, and so on, then he violates this condition and that leads
to some damage as a result of that violation, then he is liable. But apart
from that, it is not valid to stipulate that he is liable. If this is
stipulated, then that condition is not valid. End quote.

It says in Durar al-Hukkaam
Sharh Majallat al-Ahkaam (1/514): If he stipulates that the lessee is
liable in the event of damage or ruin of the leased item without any misuse
or shortcoming on his part, or he stipulates that the leased item should be
returned to the lessor without anything wrong with it, then the lease is
invalid. End quote.

The Maalikis also stated clearly
that the lease is invalid if it is stipulated that the lessee is liable. See
al-Mudawwanah (3/450); Bulghat as-Saalik 4/42

In al-Mawsoo‘ah al-Fiqhiyyah
(1/286) it says:

It is not permissible to
stipulate that the lessee is responsible for maintenance of the leased item,
because that leads to ambiguity with regard to fees. Thus the lease is
rendered invalid by this stipulation, according to the consensus of the
madhhabs. If the lessee or tenant lives in the accommodation, he has to pay
the rent of a similar property, and he has the right to claim back whatever
he spent on maintenance, as well as wages commensurate with what people
usually charge, if he did that with his (the lessor or landlord’s)
permission, otherwise it is a gift (i.e., he did the work for free). End
quote.

Conclusion:

Commercial insurance is haraam,
whether the one who pays for it is the seller or the purchaser. But if the
insurance is cooperative and Islamic, then it is permissible and the seller
must arrange for it.

And Allah knows best.