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Due diligence key on sale and rent back, lawyer warns

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  • 03/09/2013
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Mortgage brokers must check a client’s equity is properly protected in sale and rent back cases, a lawyer has warned.

In August, the High Court ruled that 375 tenants of UK Housing Alliance North West, (UKHA) a sale and rent back firm in administration, were told they ranked as ‘unsecured’ creditors of the firm in insolvency terms.

Pinsent Masons senior associate Dev Desai said the High Court ruling meant it was unlikely the tenants would receive the remaining 30% of the money from their house sale: “In this case the firm went into administration and the question the households were asking was, ‘What happened to our money?’ And the answer was they lost it.

“Mortgage brokers need to make sure that the rental income does not form part of a sale and rent back scheme’s general assets, and that they are holding it in a segregated fund such as a trust fund and that fund is protected.”

In the case of the UKHA, the tenants had sold their home for an upfront payment of 70% of the price. They then rented the property from the firm, with the expectation of receiving the remaining 30% of their money after ten years had passed.

When the firm went into administration, the tenants argued the 30% payment should be treated as an expense of the administration, and should be paid back before the administrators repaid debts to the failed Icelandic bank Kaupthing.

However judge Martin Mann said the final payments were unsecured debt and formed part of the sale and rent back firm’s general assets: “I acknowledge, or course, that the case might be different had the AST tenants reserved interests in a fund represented by the rents collected over time but they did not.”

Only authorised firms can deal in sale and rent back business, although the Financial Conduct Authority does not require any specific qualification because the market is so small. However, any firm handling such business is expected to make sure the individual dealing with clients is competent.

The sale and rent back market is also subject to regulations including a ban on cold calling and the use of emotive language such as ‘mortgage rescue’ or ‘cash quickly’. Sale and rent back advisers must also send the regulator half-yearly reports on their activity.

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