Sale and rent back – how it worked

Over the last ten years there have been about 50,000 sales and rent backs involving residential property. A large number of these transactions involved an entity called North East Property Buyers (“NEPB”). Cash strapped sellers, typically in mortgage arrears, other debt, or out of work, agreed to sell their homes to NEPB who would

  • pay off the mortgage
  • pay less than the market value for the property
  • promise to make a further substantial payment after ten years (so the seller would eventually receive something close to the true market value of the property)
  • and critically, promise the sellers that they could continue to live in their properties for as long as they wished as tenants paying a discounted rent.

It sounded like a perfect solution for anyone struggling to pay a mortgage. They would receive an immediate lump sum and at the same time would be able to remain in their home for as long as they continued to pay rent at a level that was less than the mortgage payments that they had previously been struggling to make. What is more, if the sellers remained as tenants for ten years they were promised that they would receive a further lump sum as a loyalty payment. For their part the buyers (NEPB or people nominated by them) were purchasing buy to let property at a discount with a ready supply of keen tenants and would also profit from future increases in house prices. What could possibly go wrong?

The mortgage fraud

When the properties were sold, the new owners, who were nominees of, or otherwise connected to NEPB, paid the purchase price by borrowing via a ‘buy to let’ interest only mortgages secured on the individual properties. When applying for mortgages, the buyers provided untrue information to the mortgagees. In particular the lenders were told that the properties were being purchased with ‘vacant possession’ in other words with no one living in them.

The buyers then failed to make the mortgage payments and the lenders commenced proceedings to take possession of the properties. At the same time the lenders sought to evict the tenants, so that they could then sell the properties at full market value with vacant possession. In most cases that was the point at which the original owners, now tenants, discovered that something was wrong.

The negligent solicitors

A significant detail in the NEPB sale and rent back agreement was that NEPB insisted, as part of the sale and rent back deal, that the sellers used Hall & Co Solicitors in County Durham to act for them in the sales of their homes to NEPB. Unfortunately for the sellers their solicitor, Peter Maine of Hall & Co failed to take steps to ensure that they would be able to remain in their properties, failed to warn them that they would be at risk of future eviction and also failed to secure the promised future lump sum, or warn them that there was no guarantee that the promised future lump sum might not materialise. The purchasers of the properties were not NEPB but various associated individuals (about 30 people were involved in multiple property purchases) who purchased the individual homes as buy to let properties with the aid of mortgages from about 20 different lenders. Hall & Co closed in 2011 and Mr Maine died of stab wounds in 2013, in somewhat mysterious circumstances.

The victims

Unfortunately in many cases the purchasers failed to keep up with the mortgage payments and the various lenders then commenced possession proceedings in order to sell the properties and recover the money they had loaned.

The sellers, who believed that they had the right to stay in their homes for as long as they continued to pay the agreed rent, faced eviction and claimed they were secure tenants for life with ‘overriding interests’ that meant that the lenders could only sell the properties subject to their continuing right to remain in the properties.

Obviously, a property with tenants paying a discounted rent is likely to be worth a lot less than a property which can be sold with vacant possession.

This meant that either the lenders or the tenants would end up losing out and the Supreme Court  had to make the decision in the case of Rosemary Scott v Southern Pacific Mortgages Limited & Others [2014] UKSC 52. On 22 October the Supreme Court judgment was handed down. The result was that Mrs Scottwho was one of the former owners who had sold her property to a nominee of NEPB, Ms Amee Wilkinson, lost her claim to security of tenure. Southern Pacific Mortgages have obtained possession of Mrs Scott’s former home which they will now be able to sell with the benefit of vacant possession once they have evicted Mrs Scott. Mrs Scott’s case was one of ten test cases and the Supreme Court decision means that all of the other hundreds, if not thousands, of former owners who are in the same position now face losing their homes. There were about 100 former owners involved in the NEPB scheme in the Newcastle area alone who all faced similar possession proceedings. Now Mrs Scott (along with all of the other former owners who entered into similar transactions) has a potential solicitor’s negligence claim against Hall & Co for the failure to warn her of the risks that she was taking in proceeding with the sale and rent back. There may be about 50,000 people who have entered into similar sale and rent back transactions so the impact of this decision could be enormous.

The problem has been recognised by the Financial Services Authority and in 2009 sale and rent back transactions became a regulated activity under section 19 of the Financial Services and Markets Act 2000. It is now recognised that most sale and leaseback transactions were unaffordable, or otherwise unsuitable and should never have been sold. Fortunately such transactions are believed to now be extremely rare.

The moral – how to avoid becoming a victim of fraud

For the victims of the solicitors’ negligent failure to advise them properly about the risks of sale and rent back transactions, this has been a costly experience. Many now face eviction from their homes.

There have been many large scale property frauds which have involved buy to let property, or other property investments. The victims are invariably given promises that are plausible even if they might on reflection sound too good to be true. In most cases the victims rely on representations made by fraudsters who act as middlemen and rely on solicitors and surveyors arranged by the fraudsters. Often the ‘deal’ will include free legal services if you use the nominated solicitor. ‘Free’ legal advice can all too often end up becoming very costly. It is always advisable to choose your own solicitor and make sure that he or she knows exactly what the transaction involves. That way you will have advice from a solicitor who you know is working for you and if things do go wrong, a good chance of being able to obtain compensation from your solicitor’s professional indemnity insurers.

The very same is true of surveyors. There are thousands of buy to let properties which have been sold to buyers who relied on the say so of property clubs and middlemen, such as Morris Properties, who failed to obtain their own valuations and as a result paid far too much for properties about which they knew far too little.

If it sounds too good to be true……