Purchasing BTL but vendor wants to stay on - can we issue tenancy to vendor?

BlueC

Hi all

I'm aware that sale and rent back (SARB) schemes are heavily regulated and the industry basically doesn't exist anymore. However, I am wondering whether our current position falls foul of the FCA legislation or would be deemed to be ok. Obviously I'll ask our solicitor but I wanted to garner wider opinion too because it doesn't seem very clear-cut to me.

Basic trail of events is that the seller accepted our offer on a property that was for sale on the open market that we found through Rightmove and a local agent. We are purchasing as a BTL and intend to let the property as soon as sale completes. The sale has progressed (albeit a little slowly) and meanwhile the seller has been looking for suitable onward accommodation to rent. They can't find anywhere suitable so they pulled out of the sale and withdrew the property from the market. I understand they have done this while they await probate to complete on their mother's property as this would then put them in a different position where they might be able to purchase an onward property and avoid the need to rent.

Since we are so far down the line and we do quite want this property then in an attempt to resurrect our purchase we offered to allow the vendor to rent the property from us after we complete the purchase. It seemed like a practical and pragmatic solution that might suit all parties. They were delighted with this idea and have agreed to proceed with the sale on that basis. We would let the property in our usual way via an agent (same one they are selling through as it happens) and we would give a standard 6 or 12 month AST depending on what they prefer.

It seems straightforward to me and just a case of doing something sensible that suits all parties. However, since suggesting it I have become aware of the SARB regulations and that this may be a bit of a minefield.

What does everyone think? Has anyone here done something similar? What are the potential pitfalls for each side?

SDLT_Geek

BlueC said:

Hi all

I'm aware that sale and rent back (SARB) schemes are heavily regulated and the industry basically doesn't exist anymore. However, I am wondering whether our current position falls foul of the FCA legislation or would be deemed to be ok. Obviously I'll ask our solicitor but I wanted to garner wider opinion too because it doesn't seem very clear-cut to me.

Basic trail of events is that the seller accepted our offer on a property that was for sale on the open market that we found through Rightmove and a local agent. We are purchasing as a BTL and intend to let the property as soon as sale completes. The sale has progressed (albeit a little slowly) and meanwhile the seller has been looking for suitable onward accommodation to rent. They can't find anywhere suitable so they pulled out of the sale and withdrew the property from the market. I understand they have done this while they await probate to complete on their mother's property as this would then put them in a different position where they might be able to purchase an onward property and avoid the need to rent.

Since we are so far down the line and we do quite want this property then in an attempt to resurrect our purchase we offered to allow the vendor to rent the property from us after we complete the purchase. It seemed like a practical and pragmatic solution that might suit all parties. They were delighted with this idea and have agreed to proceed with the sale on that basis. We would let the property in our usual way via an agent (same one they are selling through as it happens) and we would give a standard 6 or 12 month AST depending on what they prefer.

It seems straightforward to me and just a case of doing something sensible that suits all parties. However, since suggesting it I have become aware of the SARB regulations and that this may be a bit of a minefield.

What does everyone think? Has anyone here done something similar? What are the potential pitfalls for each side?

The problem is for the buyer, whose actions can be criminalised as a result of an amendment to the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 (SI 2001/1177) made by the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2014 (SI 2014/3340) which came into force on 31 December 2014.  The effect is to regulate someone who only enters into only one transaction as this is treated as being “by way of business”.

It is a criminal offence for a person to buy a property in a regulated sale and rent back agreement unless the person is an authorised or an exempt person under the Financial Services legislation or an exclusion applies: there is an exclusion where the buyer and the seller/tenant are closely related.  In the ordinary case of a buyer proposing to rent the property back to the seller there is no exemption.

There is guidance  from the Financial Conduct Authority in their Perimeter Guidance Manual at section 14.5 Q38E. 

tacpot12

I don't think you would be caught by the regulations or have to register with the FCA to do this, providing that this is your only "Sale and Rent Back" arrangement. If you wanted to do another, it would change things.

The potential downsides for the seller is that you will only grant them an Assured Shorthold Tenancy on their property, which means you could evict them within a year. They need to think carefully about this, especially as they haven't managed to find anywhere suitable yet. 12 months sounds like a long time, but if the probate completes this year and they get their money this year, it might take three or four months into the new year for their purchase to complete. If anything goes wrong with their purchase, and they turn out to be bad tenants, you might well be evicting them in 12 months when this is a bad time for them.  

The downsides for you are:

1) that they might not be good tenants because they still regard the property as "theirs" to some extent.
2) that you will have a harder time ensuring that the property meets the necessary legislative requirements to be rented - it's always easier to get repairs and checks done if tenants are not in the property. 

I would recommend that if you are going to take them on as tenants, do a tenant referencing check like you would for any other tenant.

I would also suggest you ask your solicitor whether you need them vacate the property upon completion, and then move back in as tenants. This would seem to be the safest option, but they will not want to do so if it means moving all their furniture out for a night before moving it all back in again.   
 

SDLT_Geek

tacpot12 said:

I don't think you would be caught by the regulations or have to register with the FCA to do this, providing that this is your only "Sale and Rent Back" arrangement. If you wanted to do another, it would change things.

 
 

On what basis I wonder?  The amendment to the regulations says that someone who enters into only one transaction is treated as acting “by way of business”.

user1977

SDLT_Geek said:

tacpot12 said:

I don't think you would be caught by the regulations or have to register with the FCA to do this, providing that this is your only "Sale and Rent Back" arrangement. If you wanted to do another, it would change things.

On what basis I wonder?  The amendment to the regulations says that someone who enters into only one transaction is treated as acting “by way of business”.

Indeed - people here are very fond of pointing out to landlords (who only let one property) that they are running a lettings business, so I don't see the difference in this case. I don't think that you need to have a more significant track record of running a sale-and-rent-back business in order to be caught.

SDLT_Geek

That is right, the FCA regulations are clear that even a “one off” is caught.

rexmedorum

tacpot12 said:

...

1) that they might not be good tenants because they still regard the property as "theirs" to some extent.
2) that you will have a harder time ensuring that the property meets the necessary legislative requirements to be rented - it's always easier to get repairs and checks done if tenants are not in the property. 

... 

Regardless of reultaion, both points by @tacpot12 are good points. Especially 1): I think it would be almost inevitable that they would feel as if it was theirs, do whatever they feel like without asking permission quite possibly get upset if you wanted to do a regular inspection or wanted to make chamges etc. I think it could really complicate the LL - tenant relationship.

dimbo61

You MUST have everything in place in order to rent the property.
EPC rating of E or better still C ( as its for sale what is the current EPC ?)
Gas Safe Certificate
EICR
Fit for human habitation 
Before we talk about Fire safety or security.
You might need to spend £££££ before its ready to rent.
Would you have a Video Inventory done before any tenant moves in ?

BlueC

Thanks everyone. Thanks for the input on the practicalities of what needs to be in place before letting. We are experienced in this area and confident would could do all of this before completion, but this was not the focus of my question.

Interesting to get different views on whether the FCA legislation applies. Obviously the legislation was designed to stop the appalling abuse of the system and to prevent bad actors from targetting home owners in order to buy cheaply and then force the owners out. It has worked too because the industry doesn't really exist any more from what I can gather.

I was interested in whether it would apply to our situation and there's a bit of uncertainty here, or at least differing opinions. The wording and legalise of these things doesn't help to make things clear for lay people. However, I am 99% sure that, unless he knows of some specific exceptions which he is absolutely certain would apply, then my solicitor will say that "testing" the legislation is not something we should consider and he will advise against it and probably refuse to act on our behalf if that was what we chose to do.

It's a shame because this could have worked favourably for all parties so it seems like a case of the morally bankrupt minority spoiling things for the rest of us.

Flick85

I was hoping to sell my flat as a BTL and then rent it back until the new build house I want to buy is ready. But, the sell and rent back rules make that impossible. Totally understandable why it was put in place, but very frustrating when there are legitimate reasons that benefit both parties where no one is being exploited. Ah well 🤷‍♀️

peterhjohnson

Around 15 years ago, a friend put her flat on the market and had a quick offer from a BTL landlord.
As she had not yet identified her onward purchase, she arranged to remain as a tenant. I think it took about 6 months for her to find her new home and move out. I don't know the full details but it seemed to "work" to the satisfaction of all parties.