What Is the Ruling on Paying a Large Refundable Amount to the Landlord in Exchange for Reduced Monthly Rent, With the Full Amount Returned at the End of the Contract?

Question: As salamu Alaykum , shaykh In our City which is in south part of india, there is a lease system where the tenant gives the owner a large refundable amount, for example ₹10 lakh, and in return lives in the house for 5–10 years. The tenant also pays a fixed small monthly rent, such as ₹2,000, even though the normal rent for that house may be around ₹10,000 per month. At the end of the lease period, the owner returns the ₹10 lakh. Is this type of arrangement permissible in Islam, or does it involve riba or any other Shariah issue? JazakAllahu Khairan.

Summary:

The arrangement described is not permissible according to Shariah if the large amount, such as one million rupees, is returned in full to the tenant at the end of the contract, and paying this amount is the reason for reducing the monthly rent below the normal market rate, such as when the normal rent is 10,000 rupees but the tenant pays only 2,000 rupees. This is because the refundable amount is, in reality, a loan from the tenant to the property owner. Due to this loan, the tenant receives a stipulated benefit, namely the reduction in rent. Therefore, it falls under a loan that brings a benefit to the lender, which is prohibited riba. Fatawa have been issued concerning arrangements that are almost identical to this particular case.

Answer:

First: The Nature of the Transaction

The transaction mentioned consists of two matters:

The tenant pays, for example, 1,000,000 rupees to the owner of the house and then receives the entire amount back after five or ten years. In return, the owner rents the house to him for a very low rent, such as 2,000 rupees per month instead of 10,000 rupees.

The one million rupees here is not genuine rent because the entire amount will be returned to the tenant. Rather, in reality, it is a loan from which the property owner benefits for the duration of the contract.

In return, the lender, who is the tenant, receives a benefit because of his loan, namely living in the property for less than the normal market rent.

This is the reason for its prohibition.

Second: Evidence From the Quran

From the Qur'an:

[Al-Baqarah: 275]
“Allah has permitted trade and forbidden riba.”
The verse from Surah Al-Baqarah with its tafsir. The basic principle regarding leasing is that it is permissible. However, if it is combined with a loan through which the lender receives a stipulated benefit, the transaction enters into the category of riba.

Third: Evidence From the Sunnah

From the Sunnah:

Narrated by Abu Dawud, At-Tirmidhi, An-Nasai, and others. At-Tirmidhi said that it is a hasan sahih hadith, and Al-Albani رحمه الله authenticated it.Abdullah ibn Amr رضي الله عنهما narrated that the Messenger of Allah ﷺ said:
“A loan combined with a sale is not permissible.”
The point of evidence is that the Shariah prohibits combining a loan with a compensatory transaction when this results in the lender benefiting from his loan. This is because the loan then ceases to be a benevolent loan and instead becomes a means of obtaining a benefit in return for it. There is also a severe warning concerning riba.
Narrated by Muslim.Jabir رضي الله عنه narrated:
“The Messenger of Allah ﷺ cursed the one who consumes riba, the one who pays it, the one who records it, and its two witnesses, and he said: ‘They are all the same.’”

Fourth: The Hadith, “Every Loan That Brings a Benefit Is Riba” The hadith, “Every loan that brings a benefit is riba,” was graded weak by Shaykh Al-Albani رحمه الله. However, its meaning is an established fiqh principle recognized by the scholars, supported by the Shariah evidences, and applied in matters relating to loans. This wording is not authentically established as a hadith attributed to the Prophet ﷺ. However, its meaning is correct when the benefit is stipulated or mutually agreed upon beforehand. The consensus of the scholars has been reported regarding the prohibition of a loan that includes a condition requiring an additional benefit for the lender.

From the Scholars:

Fatwa of Shaykh Ibn Baz رحمه الله Regarding the Hadith, “Every Loan That Brings a Benefit Is Riba”
This loan is not permissible because it includes the condition that the borrower give a similar loan to the lender. This involves one contract within another and therefore comes under the ruling of two sales in one sale. It also stipulates an additional benefit beyond the loan itself, namely that the borrower must lend him an equivalent amount. The scholars are unanimously agreed that every loan which includes a stipulated additional benefit, or an agreement upon such a benefit, is riba.

Fifth: Statements of the Scholars Regarding This Particular Form of Transaction

From the Scholars:

Al-Maziri رحمه الله said in Sharh At-Talqin:
“If the benefit is stipulated within a loan contract, then this is not permissible without any difference of opinion whatsoever.”
Ibn Qudamah رحمه الله said:
“Every loan in which it is stipulated that the borrower must give an increase is prohibited, without any difference of opinion.”
Ibn Al-Mundhir رحمه الله said:
“They unanimously agreed that if the lender stipulates that the borrower must give him an increase or a gift, and lends him money on that basis, then taking that increase is riba...”
It was also narrated from Imam Ahmad رحمه الله that he said:
“I dislike the loan of houses, and it is pure riba.”
Shaykh Ibn Baz رحمه الله also mentioned that every loan containing a stipulated additional benefit for the lender, or an agreement upon such a benefit, is riba. The scholars were asked about a case almost identical to the question:

From the Scholars:

Fatwa: A Refundable Advance Payment in Exchange for Reduced Monthly Rent
The tenant pays an advance amount that is returned to him at the end of the contract, while the landlord reduces the rent because of this payment. The answer stated: “The reality of this transaction is that it consists of a lease contract combined with a loan... The landlord reduces the rental amount for the tenant in exchange for this loan... Therefore, this contract in this form is prohibited and it is not permissible to enter into it.”
Another fatwa concerning paying a refundable amount in exchange for very low rent discussed the following arrangement: A sum of money is paid to the owner of the house and later returned, in exchange for living in the house at a very low rent. It stated that this amount is not a security deposit; rather, it is a loan, and that the reduction in rent is a benefit obtained by the lender because of his loan.
Fatwa Regarding Living at a Very Low Rent in Exchange for a Refundable Amount
A very similar question was also asked: a large sum of money is paid in exchange for living in a property for a specified period, after which the same amount is returned while the tenant pays only a small rent. The answer stated that this comes under a loan that brings a benefit because the lender benefits by living in the property for less than the normal market rent.

Sixth: How Can the Transaction Be Permissible? What is permissible is for the lease to be independent of the loan. The two parties may agree upon a known rent for the house, but the reduction in rent must not be conditional upon lending the owner a sum of money which he benefits from and later returns. As for a genuine security deposit that is taken as security against damage or loss and is then returned if there is nothing requiring a deduction from it, while the owner does not benefit from it in the manner of a loan, then this is a different case from the one mentioned in the question. What matters is the reality of the contract, not what it is called. Calling it a “security deposit” or an “advance payment” does not change the ruling if its reality is that the tenant gives money to the owner, the owner benefits from it for several years and then returns it, while the tenant receives a reduction in rent in exchange for it. Conclusion: The rental system mentioned in the question is not permissible in this form because the large sum that is returned in full at the end of the agreed period is, in reality, a loan from the tenant to the owner. Reducing the rent from approximately 10,000 rupees to 2,000 rupees is a stipulated benefit received by the tenant because of this loan. Therefore, it falls under a loan that brings a benefit to the lender, which is prohibited riba. However, if the amount paid is genuine rent that is not refundable, or if there is a genuine and independent security deposit from which the owner does not benefit as he would from a loan and which does not result in a reduction in rent, then this is a different situation, and its ruling depends on the details of the contract.

And Allah knows best.

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What Is the Ruling on Paying a Large Refundable Amount to the Landlord in Exchange for Reduced Monthly Rent, With the Full Amount Returned at the End of the Contract?

Summary:

From the Qur'an:

From the Sunnah:

From the Scholars:

From the Scholars:

From the Scholars:

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