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PART 10
November 2009
SALE AND LEASEBACK SCHEMES
33.219 Sale and leaseback schemes - general
Sale and lease-back schemes (sometimes called sale and rent-back schemes) are designed to allow a homeowner to sell their property but remain living in it by entering into a rental agreement with the purchaser. The benefit to the homeowner is that there may be a release of equity from the property and/or a lowering of the monthly accommodation expense (where the rent charged is lower than the mortgage) without having to leave the property.
See Part 9 of this chapter regarding the similar public sector Mortgage to Rent Scheme
33.220 Sale and lease-back schemes - regulation
Typically, sale and lease-back schemes are operated by businesses specialising in the scheme, and until July 2009 the sector was largely unregulated. The un-regulated nature of the sector led to concerns over the way that the schemes were marketed and operated (see paragraph 33.225). As a result, the Financial Services Authority (FSA) instigated a regulation regime from 1 July 2009. Amongst other things, firms offering sale and lease-back schemes have to provide an independent valuation of the property so that the customer can be satisfied that they are getting a fair price for the property – this having been one of the main concerns over the way that the schemes operated.
Since 1 July 2009, in order for a person to be in a position to offer sale and leaseback schemes, he/she must be authorised to do so by the FSA.
33.221 Sale and lease-back schemes as transactions at an undervalue
Prior to regulation, the key feature of a typical sale and lease-back scheme was that the property was often sold to the business operating the scheme at less than the true market value of the property. Where a bankrupt has entered into the scheme before 1 July 2009, it is this aspect which may open it up to challenge as a transaction at an undervalue (See Chapter 31.4A).
Assuming that all the other features of a transaction at an undervalue are in place then any agreement that provided for the property to be sold at less than its market value should be challenged as a transaction at an undervalue. It is likely that a below-market value sale of a property under one of these schemes would meet all the relevant conditions to be challenged as a transaction at an undervalue.
33.222 Challenging a sale and leaseback agreement as a transaction at an under value
The decision on how best to attack the agreement as a transaction at an undervalue (see paragraph 33.221) would normally be left to the Service’s antecedent recovery contractor (see Part 1 of Chapter 31.4A) but options available to the sale and lease-back business are to restore the property to the bankruptcy estate (holding the rights of the original chargeholder – assuming they were paid in full) or making good the loss to the estate.
33.223 Sale and lease-back agreement as a transaction defrauding creditors
Where it can be shown that the sale of the property was conducted with the intention of putting assets beyond the reach of creditors then the sale may be challenged as a transaction defrauding creditors (see Chapter 31.4B, Part 7). For the reasons given in paragraphs, the official receiver would not normally attack the transaction under these provisions, but seek recovery as a transaction at an undervalue. The circumstances of the sale may be relevant if the official receiver considers the bankrupt’s conduct to merit a BRO.
33.224 Sale and lease-back agreement fees as a transaction at an undervalue
Prior to regulation of the sector (see paragraph 33.220), it was not unusual for a sale and lease-back scheme to involve fees that some might describe as exorbitant or, certainly, unreasonable. It is likely that the fees paid will be in excess of any true value in the service provided by the sale and lease-back business. Where the official receiver considers this to be the case any unreasonable fees may be recovered as a transaction at an undervalue (see Chapter 31.4A).
33.225 General concerns about sale and lease-back schemes
As outlined in paragraph 33.220, concerns were raised as to the fairness with which the schemes were marketed and operated – particularly that they were often targeted at those in extreme financial difficulty and are usually entered into without the opportunity to seek independent advice. This often resulted in the individual entering into the scheme when, in fact, that might not be the best option for them.
Homeowners were often persuaded that they would have security of tenancy following the sale when, in fact, they may have only been given a short term (6-12 month) tenancy agreement. The rental agreement may have strict eviction “triggers” and the expiration of the tenancy agreement is sometimes followed by eviction or a prohibitive rent increase meaning that the individual may lose their home - that is, the very outcome they were hoping to avoid (having already given up all, or at least a large proportion, of the equity).
In some cases not all of the agreed sale price is paid up front and some may be due at pre-agreed dates and on the meeting of certain conditions (such as the homeowner giving vacant possession). There may also be a retention for “repairs” or “improvements “ to the property.
Since regulation (see paragraph 33.220) it is unlikely that sale and leaseback schemes will have any of these features.
33.226 Official receiver to report concerns
Where the official receiver has concerns about the circumstances in which a bankrupt has entered into one of these schemes, or the terms of the agreement (particularly, where the person operating the scheme was not authorised to do so – see paragraph 33.220) the details may be reported to the local trading standards department.
33.227 “Buy-back” clauses in the sale and lease-back agreement
A sale and leaseback agreement will often include an option allowing the homeowner to re-purchase the property at a pre-agreed date for a pre-agreed price. It is not unusual that the conditions of this “buy-back” clause are such as to make exercising the right unattractive. That said, the right would be an asset in any subsequent bankruptcy proceedings and, where it is not possible to have the sale and leaseback agreement overturned as a transaction at an undervalue, the right to re-purchase should be passed to the RTLU for possible exercising of the right and consequent realisation of the property (see Case Help Manual Part on Long Term Assets).
33.228 “Buy-back” clauses and the family home
As a “buy-back” clause (see paragraph 33.227) is property comprised in the bankruptcy estate consisting of an interest in a dwelling house [note 1] (see Part 1), the three-year rule for dealing with the property applies [note 2]. Where the “buy-back” clause is not going to be exercisable until after the expiration of the three-year period for dealing with the property, the official receiver will need to apply to court for an extension of that period [note 3]. The application should request an extension to a period six months after the date that the official receiver becomes aware that the “buy-back” clause is effective.
Such an application requires the sanction of the Secretary of State. Should such sanction be required contact should be made with Technical Section (technical.section@insolvency.gsi.gov.uk) who have authority to provide sanction on behalf of the Secretary of State.
33.229 Enquiries to be made regarding sale and leaseback agreements entered into prior to 1 July 2009
Where the bankrupt has entered into a sale and lease-back agreement prior to 1 July 2009 the official receiver should seek to obtain the following information/documents to establish whether there are any matters of recovery and/or matters of wrongdoing that may lead to a BRO/U:
The information may be obtained from the bankrupt or the sale and lease-back business as appropriate.
33.230 Enquiries to be made regarding sale and leaseback agreements entered into after to 1 July 2009
Where the bankrupt enters into a sale and leaseback scheme after 1 July 2009, a check should be made that the firm who arranged the scheme was authorised to do. This can be checked on the FSA website (http://www.fsa.gov.uk/register/home.do). Assuming that the scheme was arranged by an authorised person, there are unlikely to be any further concerns for the official receiver.
The official receiver should, however, obtain a copy of the valuation carried out prior to the sale of the property to the sale and leaseback business and, where there is doubt over the accuracy of the valuation, carry out further enquiries (such as viewing the sale prices of similar properties in the area on web-sites such as www.nethouseprices.com) to satisfy himself/herself of the precision of the valuation.
33.231 Enquiries into circumstances leading to bankrupt entering a sale and leaseback scheme
Where appropriate, the official receiver should make enquiries into the circumstances that led to the bankrupt becoming in a position of negative equity – particularly where further borrowing (rather than a reduction in the value of the property) was the cause. The official receiver should be satisfied that the disbursement of any further borrowings can be accounted for.
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