The SRA (Solicitors Regulatory Authority) has issued a warning to conveyancers to be on their guard even if you do a single sale and rent back transaction.
The warning states “Since 16 September, anyone who conducts SRB business–even a single transaction; must be authorised by the FSA, unless they are related to the customer. To read the legislation in full go to www.legislation.gov.uk
.” The link points to the following legislative reference:
“Entering into a sale and rent back agreement
A person (“A”) who carries on an activity of the kind specified by article 63J(1) of the Regulated Activities Order (entering into a regulated sale and rent back agreement)(2) is to be regarded as carrying on that activity by way of business except where A is a related person in relation to the agreement seller within the meaning of article 63J(4)(c) of the Regulated Activities Order.”
The SRA warning follows an FSA warning the public about rogue firms who think they can avoid regulation, by offering products that pay off consumers’ debts, allow them to stay in their own homes, with the actual sale of the property delayed. These products are often called "Lease Options", or "Exchange with Delayed Completion" arrangements, but are in fact regulated sale and rent back agreements, even if the sale of a property is not fully completed. Firms offering them therefore need to be authorised by the FSA for SRB activities and are subject to regulatory requirements.lin
The FSA warning indicates “If you have mortgage arrears, are facing repossession or have other financial problems, we advise you to treat with caution any product that appears to pay off your debts and allows you to remain in your home without selling it immediately.
Products or agreements fitting this description can include Exchange with Delayed Completion (EDC) or Lease Options contracts. We are concerned that EDCs and Lease Options are being sold by unauthorised firms, thinking they can avoid our regulation because the sale has not been fully completed. However, if the product or agreement allows you, as the owner, to remain in your property, it is likely to be a regulated sale and rent back (SRB) agreement. If it is, the firm or individual providing the product must be authorised by us for SRB activities. If you deal with unauthorised firms you are exposing yourself to increased risks and no regulatory protections.”
Usefully the FSA sets out in plain terms what each of these methods are:
"What are SRB agreements?
Regulated SRB agreements are where you sell your home, commonly for less than its open market value (typically around 30% less), and in return you are allowed to remain in your home as a tenant for a minimum period of five years. You may have to leave your home at the end of this tenancy period and may also have to leave if you breach any of the terms of the tenancy agreement.
What are EDC contracts?
These are contracts where you agree, with a prospective buyer, a sale price of your home and exchange contracts with the prospective buyer who pays you an agreed deposit sum. Completion of the sale of your home is then delayed for a number of years. This is not a SRB agreement if you then move out
However, if contract allows you to remain in your home, it is likely to be a regulated SRB agreement, so the firm or individual needs to be regulated by the FSA.
What are Lease Options?
These are similar to EDCs, where a prospective buyer of your home pays you an agreed upfront amount in return for the right to buy your home (at its then value) at some point, typically a number of years, in the future. As part of this deal, the buyer would normally take up tenancy of your home in return for paying your mortgage and you move out. This is not a SRB agreement as you have moved out.
However, if the Lease Option allows you to remain in the property and make regular payments to the prospective buyer instead of paying your mortgage, this is likely to be a regulated SRB agreement, so the firm or individual needs to be regulated by the FSA.
What are the risks
Unlike normal SRB, under these arrangements you remain responsible for the property and mortgage even if the prospective buyer takes over making the payments to your lender. So if for any reason the prospective buyer gets into financial difficulties and walks away from the deal, you will be responsible for any debts or missed payments.
If you are currently struggling to pay your mortgage and are offered the option of staying in the property and paying rent to the prospective buyer, you need to consider carefully whether you will be able to afford the payments.
You may have to leave the property, or sell it at a reduced price, if you do not keep up with the monthly payments.
You could be agreeing to unfair contract terms without considering the longer-term implications.
Even if you are not in arrears, but are looking to raise cash from your home, you should treat these products with caution. In most cases homeowners are likely to be better off selling their home normally rather than using these riskier alternatives.”