House previously bought at undervalue: can my transaction be voided?

BikingBud

lb00 said:

silvercar said:

Is your solicitor local? Does he know the area?

I would be asking him/ her by email or in writing whether his undervalue opinion still stands given that you have established that there was a tenant and the purchase was part of a portfolio purchase. 

Personally, if it was in my area, I would think both those factors would influence the price and I wouldn’t be concerned. 

The rent being paid is at market level, so the discount is really just because the tenant is already living there and we're buying three flats from the same person. The flat's condition hasn't changed, no renovations have been done.

Yes, my solicitor is local, but I'm not too happy with him. He's very cautious and always brings up a lot of concerns, but in my opinion, he can't really solve them in a practical way. Still, we are very close to exchange now so changing solicitor is not a viable option.

What has the rent got to do with anything?

I thought this was about the purchase of a flat for below market value by the current owner, who bought 3 at the same time.

The rent being paid is irrelevant 

Or is this justification from the current vendor for the price increase?

Please be clear as people can only advise if you give accurate details. 

silvercar

Hoenir said:

lb00 said:

silvercar said:

Is your solicitor local? Does he know the area?

I would be asking him/ her by email or in writing whether his undervalue opinion still stands given that you have established that there was a tenant and the purchase was part of a portfolio purchase. 

Personally, if it was in my area, I would think both those factors would influence the price and I wouldn’t be concerned. 

The rent being paid is at market level, so the discount is really just because the tenant is already living there and we're buying three flats from the same person. The flat's condition hasn't changed, no renovations have been done.

Why would the previous seller give away a £100k.......... makes no sense at all. 

The previous seller may not have given away anything, if buying 3 properties at once from the same seller, the buyer may not care what price is allocated to each one. However, the seller may have an interest in one being priced on the high side and one on the low side for whatever reason ( family distributions of price achieved/ CGT liability / care costs). The buyer could just have been agreeing to the distribution to keep the seller happy.

lb00

BikingBud said:

lb00 said:

silvercar said:

Is your solicitor local? Does he know the area?

I would be asking him/ her by email or in writing whether his undervalue opinion still stands given that you have established that there was a tenant and the purchase was part of a portfolio purchase. 

Personally, if it was in my area, I would think both those factors would influence the price and I wouldn’t be concerned. 

The rent being paid is at market level, so the discount is really just because the tenant is already living there and we're buying three flats from the same person. The flat's condition hasn't changed, no renovations have been done.

Yes, my solicitor is local, but I'm not too happy with him. He's very cautious and always brings up a lot of concerns, but in my opinion, he can't really solve them in a practical way. Still, we are very close to exchange now so changing solicitor is not a viable option.

What has the rent got to do with anything?

I thought this was about the purchase of a flat for below market value by the current owner, who bought 3 at the same time.

The rent being paid is irrelevant 

Or is this justification from the current vendor for the price increase?

Please be clear as people can only advise if you give accurate details. 

Sorry I was referring to this reply by silvercar

silvercar said:

I know it isn’t identical, but I’ve been reading articles where a jointly owned property is valued where one of the owners remains and the other moved out eg a couple where one needs care and the property is owned 50/50. The standard is that the 50% ownership is devalued by 15% to account for the property being occupied. So taking 85% of the empty valuation to allow for the tenant may not be unreasonable in some cases eg a tenant with sitting tenants rights or a very reduced rent. Of course, for an investor in BTL buying a property with a tenant paying market rent, there is no discount at all.

and saying that in my case the rent that is being paid is at market level. 

I think the current owner got such a discount because they bought 3 flats at the same time from the same seller and there was a tenant in situ. Also, from a conversation with the EA the previous owner was in a hurry to sell so wanted to achieve a quick sale. The current owners bought the property with limited due diligence (basically raising almost no enquiries).

Question is now whether this is enough to justify such a price difference a few months apart and claim the sale was not at an undervalue or not. 

Hoenir

lb00 said:

BikingBud said:

lb00 said:

silvercar said:

Is your solicitor local? Does he know the area?

I would be asking him/ her by email or in writing whether his undervalue opinion still stands given that you have established that there was a tenant and the purchase was part of a portfolio purchase. 

Personally, if it was in my area, I would think both those factors would influence the price and I wouldn’t be concerned. 

The rent being paid is at market level, so the discount is really just because the tenant is already living there and we're buying three flats from the same person. The flat's condition hasn't changed, no renovations have been done.

Yes, my solicitor is local, but I'm not too happy with him. He's very cautious and always brings up a lot of concerns, but in my opinion, he can't really solve them in a practical way. Still, we are very close to exchange now so changing solicitor is not a viable option.

What has the rent got to do with anything?

I thought this was about the purchase of a flat for below market value by the current owner, who bought 3 at the same time.

The rent being paid is irrelevant 

Or is this justification from the current vendor for the price increase?

Please be clear as people can only advise if you give accurate details. 

Sorry I was referring to this reply by silvercar

silvercar said:

I know it isn’t identical, but I’ve been reading articles where a jointly owned property is valued where one of the owners remains and the other moved out eg a couple where one needs care and the property is owned 50/50. The standard is that the 50% ownership is devalued by 15% to account for the property being occupied. So taking 85% of the empty valuation to allow for the tenant may not be unreasonable in some cases eg a tenant with sitting tenants rights or a very reduced rent. Of course, for an investor in BTL buying a property with a tenant paying market rent, there is no discount at all.

and saying that in my case the rent that is being paid is at market level. 

I think the current owner got such a discount because they bought 3 flats at the same time from the same seller and there was a tenant in situ. Also, from a conversation with the EA the previous owner was in a hurry to sell so wanted to achieve a quick sale. The current owners bought the property with limited due diligence (basically raising almost no enquiries).

Question is now whether this is enough to justify such a price difference a few months apart and claim the sale was not at an undervalue or not. 

Will they provide a declaration or not? If the transaction was above board. Then there's no reason to comply with the request. Failure not to do so can only raise the question why not. 

lb00

Hoenir said:

lb00 said:

BikingBud said:

lb00 said:

silvercar said:

Is your solicitor local? Does he know the area?

I would be asking him/ her by email or in writing whether his undervalue opinion still stands given that you have established that there was a tenant and the purchase was part of a portfolio purchase. 

Personally, if it was in my area, I would think both those factors would influence the price and I wouldn’t be concerned. 

The rent being paid is at market level, so the discount is really just because the tenant is already living there and we're buying three flats from the same person. The flat's condition hasn't changed, no renovations have been done.

Yes, my solicitor is local, but I'm not too happy with him. He's very cautious and always brings up a lot of concerns, but in my opinion, he can't really solve them in a practical way. Still, we are very close to exchange now so changing solicitor is not a viable option.

What has the rent got to do with anything?

I thought this was about the purchase of a flat for below market value by the current owner, who bought 3 at the same time.

The rent being paid is irrelevant 

Or is this justification from the current vendor for the price increase?

Please be clear as people can only advise if you give accurate details. 

Sorry I was referring to this reply by silvercar

silvercar said:

I know it isn’t identical, but I’ve been reading articles where a jointly owned property is valued where one of the owners remains and the other moved out eg a couple where one needs care and the property is owned 50/50. The standard is that the 50% ownership is devalued by 15% to account for the property being occupied. So taking 85% of the empty valuation to allow for the tenant may not be unreasonable in some cases eg a tenant with sitting tenants rights or a very reduced rent. Of course, for an investor in BTL buying a property with a tenant paying market rent, there is no discount at all.

and saying that in my case the rent that is being paid is at market level. 

I think the current owner got such a discount because they bought 3 flats at the same time from the same seller and there was a tenant in situ. Also, from a conversation with the EA the previous owner was in a hurry to sell so wanted to achieve a quick sale. The current owners bought the property with limited due diligence (basically raising almost no enquiries).

Question is now whether this is enough to justify such a price difference a few months apart and claim the sale was not at an undervalue or not. 

Will they provide a declaration or not? If the transaction was above board. Then there's no reason to comply with the request. Failure not to do so can only raise the question why not. 

Thanks.

To undertake the policy, we need:

1. A statutory declaration from a director of the transferor company

2. Full details of the nature of the transfer, including the reason for the undervalue and the name/company number of the company who transferred the property at undervalue.

We requested this information from the seller, but they maintain that their transaction was not at an undervalue and will not provide the requested information.

I've asked my solicitor again to confirm his opinion on whether the sale was at an undervalue or whether the tenant in situ at the time of their purchase and the fact that they bought three flats from the same owner can justify a £100k discount (roughly 20% of my purchase price). 
He says

The difficulty is the price that is shown on HMLR records.

Even if you take into account all the reasons you have just mentioned I do not see how that justifies the price shown at HMLR. Therefore there is a risk in proceeding without the Indemnity Policy.

What do you think?

I'm concerned that if I proceed with their view of the sale not being at an undervalue, and if the previous owner who sold to them goes bankrupt and creditors file a claim, a judge might determine the sale was at an undervalue and require me to cover the £100k difference (the extent of the undervalue).

Thank you for your insights.

user1977

Can't your solicitor source a policy which doesn't require such a declaration from the vendor? Would seem the simplest solution.

Though as previously discussed, the risk seems somewhat obscure in this scenario.

lb00

user1977 said:

Can't your solicitor source a policy which doesn't require such a declaration from the vendor? Would seem the simplest solution.

Though as previously discussed, the risk seems somewhat obscure in this scenario.

Thank you, user1977. I have asked him exactly this: if we can get some policy without the seller's information.

Sorry, but could you please expand on why you think there is little or no risk in my situation? I might be mistaken, but it doesn't seem so remote to me.

My surveyor has stated that the price being paid (£620k) is around the market value. Hence, the previous owner had the option to sell it at that value. Instead, they sold this flat, along with two others, to a property investor for £510k. I assume this was done to achieve a quick sale, possibly due to financial difficulties. Now, the current owner is reselling it for £110k more just a few months later.

Hypothetical scenario: If the previous owner goes bankrupt, the trustee might see the sale of the flat at £510k followed by my purchase at £620k a few months later. The trustee could argue that the flat was sold at an undervalue and file a claim to recover the difference. A judge might take the same view, questioning why the flat was sold for £510k when it could have been sold on the open market for £620k.

Please help me understand where I might be mistaken. Even if the seller bought three flats at once and my flat had a tenant in situ, I don't believe that justifies a 20% discount (£110k).

Thank you so much.

user1977

lb00 said:

user1977 said:

Can't your solicitor source a policy which doesn't require such a declaration from the vendor? Would seem the simplest solution.

Though as previously discussed, the risk seems somewhat obscure in this scenario.

Even if the seller bought three flats at once and my flat had a tenant in situ, I don't believe that justifies a 20% discount (£110k).

Why not? How have you assessed what the value ought to have been?

These sorts of claims typically arise where somebody has divested themselves of their property to connected parties for little or nothing, it seems rather less likely that somebody would think they have a sound case to challenge an arm's-length transaction.

silvercar

Hypothetical scenario: If the previous owner goes bankrupt, the trustee might see the sale of the flat at £510k followed by my purchase at £620k a few months later. The trustee could argue that the flat was sold at an undervalue and file a claim to recover the difference. A judge might take the same view, questioning why the flat was sold for £510k when it could have been sold on the open market for £620k.

Please help me understand where I might be mistaken. Even if the seller bought three flats at once and my flat had a tenant in situ, I don't believe that justifies a 20% discount (£110k).

The trustee would see the sale of the flat as part of the sale of 3 flats. The trustee may argue the flat was undervalue, but he would need to look at the 3 combined purchase price. Even if he thought the onward sale to you was undervalue, his claim would be against any assets the bankrupt has. If the bankrupt has no assets, unlikely given he’s just sold a portfolio, there would be 3 flats minimum to look at, not just yours, To file a claim against an unconnected party would be very rare.

There are a lot of ifs in your mind - if the seller goes bankrupt, if the seller has no assets, if the trustee looks at your purchase in isolation, if the trustee doesn’t find any assets elsewhere, if the trustee decided to look at unconnected parties…..

lb00

user1977 said:

lb00 said:

user1977 said:

Can't your solicitor source a policy which doesn't require such a declaration from the vendor? Would seem the simplest solution.

Though as previously discussed, the risk seems somewhat obscure in this scenario.

Even if the seller bought three flats at once and my flat had a tenant in situ, I don't believe that justifies a 20% discount (£110k).

Why not? How have you assessed what the value ought to have been?

These sorts of claims typically arise where somebody has divested themselves of their property to connected parties for little or nothing, it seems rather less likely that somebody would think they have a sound case to challenge an arm's-length transaction.

Thank you very much for your advice. It has to be mentioned no works at all were carried out to the property which is in the same condition now as it was when bought by my seller.

I'll look into obtaining an indemnity policy without needing information from the sellers. Additionally, I thought about asking my surveyor, who has already conducted the survey, to provide a valuation of the flat if it had a tenant in situ. Could this be useful if a Section 238 claim is triggered against me in the future?

Otherwise, do you recommend proceeding and disregarding my solicitor's advice? To be fair, he has tended to err too much on the side of caution in several other matters as well.

Thank you again.