Is it permissible to enter into a contract to purchase a new house or flat before it is built/completed? Usually, only 10% of the purchase price is paid

It is not permissible to enter into such a contract as is generally constructed and used in secular law. It is simply a sale of a right, and not of a tangible asset. However, the contract may be modified to conform to the Shariah. The very same objective can be achieved via the contract of Istisna. For details, see the article attached below.

It would not be permissible to sell the house/flat before actual possession.

We trust this answers your question.

And Allah Ta’ala knows best.

Jazakallah and Was Salaam

Ml. E. Vawda
for Daarul Iftaa

Checked and Approved: Mufti Ebrahim Desai

ISTISNA‘

'Istisna‘' is the second kind of sale where a commodity is transacted before it comes into existence. It means to order a manufacturer to manufacture a specific commodity for the purchaser. If the manufacturer undertakes to manufacture the goods for him with material from the manufacturer, the transaction of istisna‘ comes into existence. But it is necessary for the validity of istisna‘ that the price is fixed with the consent of the parties and that necessary specification of the commodity (intended to be manufactured) is fully settled between them.

The contract of istisna‘ creates a moral obligation on the manufacturer to manufacture the goods, but before he starts the work, any one of the parties may cancel the contract after giving a notice to the other 1. However after the manufacturer has started the work, the contract cannot be cancelled unilaterally.

Difference between Istisna‘ and Salam

Keeping in view this nature of istisna‘ there are several points of difference between istisna‘ and salam which are summarized below:

(i) The subject of istisna‘ is always a thing which needs manufacturing, while salam can be effected on any thing, no matter whether it needs manufacturing or not.

(ii) It is necessary for salam that the price is paid in full in advance, while it is not necessary in istisna‘.

(iii) The contract of salam, once effected, cannot be cancelled unilaterally, while the contract of istisna‘ can be cancelled before the manufacturer starts the work.

(iv) The time of delivery is an essential part of the sale in salam while it is not necessary in istisna‘ that the time of delivery is fixed.

Difference between Istisna‘ and Ijarah

It should also be kept in mind that the manufacturer, in istisna‘, undertakes to make the required goods with his own material. Therefore, this transaction implies that the manufacturer shall obtain the material, if it is not already with him, and shall undertake the work required for making the ordered goods with it. If the material is provided by the customer, and the manufacturer is required to use his labor and skill only, the transaction is not istisna‘. In this case it will be a transaction of ijarah whereby the services of a person are hired for a specified fee paid to him.

When the required goods have been manufactured by the seller, he should present them to the purchaser. But there is a difference of opinion among the Muslim jurists whether or not the purchaser has a right to reject the goods at this stage. Imam Abu Hanifah is of the view that he can exercise his 'option of seeing' (Khiyar-ur-ru’yah) after seeing the goods, because istisna‘ is a sale and if somebody purchases a thing which is not seen by him, he has the option to cancel the sale after seeing it. The same principle is also applicable to istisna‘.

However, Imam Abu Yousuf says that if the commodity conforms to the specifications agreed upon between the parties at the time of the contract, the purchaser is bound to accept the goods and he cannot exercise the option of seeing.

This view has been preferred by the jurists of the Ottoman Empire, and the Hanafi law has been codified according to this view, because it is damaging in the context of modern trade and industry that after the manufacturer has used all his resources to prepare the required goods, the purchaser cancels the sale without assigning any reason, even though the goods are in full conformity with the required specifications.

Time of Delivery

As pointed out earlier, it is not necessary in istisna‘ that the time of delivery is fixed. However, the purchaser may fix a maximum time for delivery which means that if the manufacturer delays the delivery after the appointed time, he will not be bound to accept the goods and to pay the price.

Istisna‘ as a mode of financing

Istisna‘ can be used for providing the facility of financing in certain transactions, especially in the house finance sector.

If the client has his own land and he seeks financing for the construction of a house, the financier may undertake to construct the house at that open land, on the basis of istisna‘, and if the client has no land and he wants to purchase the land also, the financier may undertake to provide him a constructed house on a specified piece of land.

Since it is not necessary in istisna‘ that the price is paid in advance, nor is it necessary that it is paid at the time of delivery, (it may be deferred to any time according to the agreement of the parties,1), therefore, the time of payment may be fixed in whatever manner they wish. The payment may also be in installments.

On the other hand, it is not necessary that the financier himself constructs the house. He can enter into a parallel contract of istisna‘ with a third party, or may hire the services of a contractor (other than the client). In both cases, he can calculate his cost and fix the price of istisna‘ with his client in a manner which may give him a reasonable profit over his cost. The payment of installments by the client may start, in this case, right from the day when the contract of istisna‘ is signed by the parties, and may continue during the construction of the house and after it is handed over to the client. In order to secure the payment of the installments, the title deeds of the house or land, or any other property of the client may be kept by the financier as a security, until the last installment is paid by the client.

The financier, in this case, will be responsible for the construction of the house in full conformity with the specifications detailed in the agreement. In the case of any discrepancy, the financier will undertake such alteration at his own cost as may be necessary for bringing it in harmony with the terms of the contract.

The instrument of istisna‘ may also be used for project financing on similar lines. If a client wants to install an air-conditioning plant in his factory, and the plant needs to be manufactured, the financier may undertake to prepare the plant through the contract of istisna‘ according to the aforesaid procedure. Similarly, the contract of istisna‘ can be used for building a bridge or a highway.

The modern BOT (Buy, Operate and Transfer) agreements may also be formalized on the basis of istisna‘. If a government wants to construct a highway, it may enter into a contract of istisna‘ with a builder. The price of istisna‘, in this case, may be the right of the builder to operate the highway and collect tolls for a specified period.