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Sale and rent back schemes (SARB)

publication date: Apr 5, 2009
author/source: Claire Barker
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sarbFirstly, it is essential to understand what sale and rent back (or SARB, as it is commonly known) actually means. Most people will, at some point, sell their property and buy somewhere else to live. Sometimes this will be to downsize and release capital or to repay all or part of a mortgage. However, it can be more difficult to sell in a recession climate, where jobs are scarce and mortgages more difficult to come by. This can lead people to decide to sell their property to an outside investor in order to release funding quickly and to avoid repossession by their existing mortgage lender. Promises are made at the outset, indicating that the seller can remain living in his home at a normal market rent. However, the reality can be rather more startling.

SARB is often described as a ‘distress sale’ and is not regulated by the Financial Services Authority. It is aimed at people in severe financial difficulties and who have often defaulted on their own mortgage. This can also mean that their money management is poor and that they may be unlikely to meet the required monthly rent payments. This will usually result in eviction.

The first and most important piece of advice is that customers should take independent financial advice before embarking on any SARB scheme. It would be potentially very dangerous to approach a SARB provider directly as this is unlikely to be the best way for a client to proceed.

This should be backed up by independent legal advice from a specialist solicitor. It’s important to find a solicitor who will understand the way in which the schemes are designed to work. Independent legal advice is especially important to ensure that the seller will have a full understanding of the nature and effect of the transaction which he proposes to enter into. A solicitor is wholly independent and is required by professional rules to always act in the best interests of the client. He or she will fully advise the seller of the risks and rewards of entering into a transaction of this nature.

Essentially, in a SARB scheme, the seller will sell his property to an investor for a percentage of its actual market value – often as little as 60 per cent of the real value. In return, an assured shorthold tenancy is granted back to the seller, who then has to pay a full market rent in order to remain living there. As the seller does not receive a long lease in return for the sale of the property, he could become homeless at the end of the initial six month rental period.

Even if the tenancy agreement is extended, the amount of rent could wipe out the proceeds of the sale over time.

Sale and rent back can also be particularly dangerous because the buyer may take a mortgage to fund his purchase. If the buyer then defaults on the mortgage, his lender may take steps to repossess the property, forcing the seller to move out to allow a sale with vacant possession.

As such, it is very welcome to see that the Treasury has stepped into recommend the immediate regulation of this somewhat tarnished industry. It’s essential that a government-backed body sets out guarantees and absolute standards which must apply in every case.

In particular, it is important to ensure that sellers can remain living in their homes, once they have sold, by virtue of a secure lease for life. The second minimum requirement is that monthly rental payments are capped or fixed when the transaction completes. This will at least ensure that sellers are fully aware at the outset as to the extent of their longer-term liabilities and can budget accordingly.

There is a place for SARB in the market but the Government must educate consumers at the earliest opportunity as to which schemes are safe, and which should be avoided at all costs.

To that end, consumers will have increased choice, but always a safe choice.

Claire Barker, Partner, Equilaw LLP.