Sale and rent back

by David Smith (see below).

There has been a remarkable growth in schemes offering to purchase properties from owner occupiers and then to lease the same property back to the former owner on appropriate terms. These have, of course, been prompted by the difficulties in the economy and the consequent problems many owners have had in meeting their mortgage repayments. As is often the case in a new sector not all the participants have behaved in an entirely professional manner and the government has therefore decided to impose a degree of regulation.

For those with funds to invest, sale and rent back can be a relatively lucrative market and a well drafted tenancy agreement can leave a landlord with few obligations other than to collect the rent. In addition, where the term of the tenancy exceeds seven years, the parties can agree that the tenant will take responsibility for repairs. Coupled with relative freedom for a tenant to make reasonable adjustments to the property, this type of tenancy can provide significant security of tenure for the tenant and an ongoing feeling of residing in their own home while preserving the new landlord's investment in the property.

However, in the hands of less scrupulous investors former owners have been induced to enter into relatively short term tenancies with little or no security of tenure. These individuals have often found themselves being evicted after as little as one year, leaving the landlord owning a property for a relatively small investment.

As a result of unscrupulous behaviour the Financial Services Authority has been tasked to regulate the sector. This has been done by requiring firms operating in the sale and rent back sector to be authorised by the FSA.

Authorisation will proceed in two stages. Initially, an interim scheme has been brought into force from 1 July 2009 and this will be replaced by a final scheme on 1 July 2010.

Applications for the interim scheme closed on 1 August 2009 and were only open to firms that had been carrying on an authorised sale and rent back scheme prior to 1 July 2009. Firms already authorised by the FSA for other business may still apply for additional authorisation to carry out sale and rent back work. New firms wishing to enter into the sector will now be unable to do so until the final scheme comes into force on 1 July 2010.

More information, including application forms, can be found on the FSA website.

David Smith works for PainSmith Solicitors, a leading specialist practice providing training and legal services to many of the top lettings agents, property investment companies, large estates, other firms of solicitors and private landlords.