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

                What is the ruling on buying a car via a lease-to-own scheme? Is the ruling different if the seller (the agent) stipulates that one must take out comprehensive insurance on the car?
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.