By way of background, M S LAW LLP are a firm of Solicitors specialising in all aspects of commercial and residential property and have become the investor’s choice of law firm.  We are at the forefront of the scheme which has commonly become known as Rent to Own/ Lease Options. Our Paul Gelder also runs a Group on Facebook called: ‘What you need to know on Options & Rent to Own’. Please feel free to look this up on Facebook and join. We also operate a free monthly e-newsletter called ‘It’s Not Rocket Science’ which gives helpful hints and tips on all things property. To subscribe please email info@ms-law.co.uk

Please note that none of the content herein constitutes legal advice of any sort. You should not act upon it and should seek legal advice before proceeding with any transaction.

There are two aspects to the scheme. Either part can be used independently of the other or used together. For simplicity, we have called the components the ‘Front End Option’ and the ‘Back End Option’. If used together this is often termed the ‘Sandwich Option.’

The scheme is generating a lot of interest from investors because it provides an opportunity to make money and control Property without relying upon prohibitively expensive mortgage finance.

Front End Option

This is for use when placing an Option on a Property not owned by you.

The terms of the Option are, broadly speaking, on the best terms that you are able to negotiate with the vendor. Typically, they will include an agreement for the investor to make payment in an amount equivalent to the cost of the vendors mortgage(s) and buildings insurance on the Property. If the Property is a leasehold flat this may also be extended to cover the amount of any maintenance agreement, service charge or rent charged under the terms of the lease.

Subject to negotiation between the parties, this may additionally include the payment of a monthly or annual fee to the vendor but this is a matter purely of negotiation and bargaining power.

In return, you will be granted an Option to buy the Property during the Option Period at a set price or be reference to an agreed formula ie/ a percentage of the valuation. In law, the Option period may be any period up to a maximum of 18 years.

If there is any mortgage(s) on the Property then under the terms of the documentation the vendor should also be prohibited from taking any further advances under them. Your Solicitor should ensure this. A Consent to Let from any existing mortgage lender(s) will also need to be obtained by you as it is likely that any existing mortgage will be a ‘buy to live’mortgage.

We would recommend that a break clause is added in your favour or termination provisions in order to protect you should you not be able to secure a ‘Back End Option’ and let the Property to a Tenant Buyer.

In order to allow you to enter into the ‘Back End Option’ as efficiently as possible we will also endeavour to obtain a signed Transfer from the vendor so that there is no delay in locating the vendor should you wish to exercise the Option to purchase.

In addition, a Power of Attorney should be obtained which, amongst other things will grant you an authority to let the Property to a Tenant Buyer and deal with any buildings insurer and mortgagee(s).

Back End Option

This has two potential functions:

1.In combination with the Front End Option (which is commonly termed the ‘Sandwich Option.’)
2.Can be used independently of the Front End Option with properties currently within your Portfolio.

Upon securing a ‘Front End Option’ in the correct terms, you will be in a position to seek a Tenant Buyer under a ‘Back End Option.’ Alternatively, if you have a Tenant Buyer ready and waiting you can enter into the ‘Back End Option’ immediately upon entering into the ‘Front End Option’.

Ordinarily, this would entail granting an Option to purchase the Property to a Tenant Buyer during the Option period at an agreed price or by reference to an agreed formula. The Option Period would obviously have to be made bearing in mind the Option you have under the Front End Option you have ie/ if you have a two year Front End Option you will not be able to grant a four year Back End Option to a tenant buyer . If the ‘Back End Option’ can be structured on terms more advantageous to you than the ‘Front End Option’ then you derive the benefit from this Ie/ if you are paying £400 per month for the ‘Front End Option’ but secure a Tenant Buyer who will pay you £550 per month for a ‘Back End Option’ then the profit deriven here is £150 per month.

A Power of Attorney granted to you by the vendor under the ‘Front End Option’ will give you the authority to let the Property under an Assured Shorthold Tenancy Agreement to a Tenant Buyer.

Similarly, if the purchase price under the ‘Front End Option is say £150 000 but under the ‘Back End Option’ £170 000 then there is potentially profit of £20 000.

Giving a Tenant Buyer this ‘Back End Option’ may distinguish you from other Landlords and allow you to charge a higher rent or a fee for giving the Tenant Buyer such an Option. It may also encourage the Tenant to remain at the Property longer and to maintain the Property in a better condition than a typical tenant. To encourage the Tenant Buyer to enter into the ‘Back End Option’, the deal may need to be structured so that part of the monies paid are to be credited towards the purchase price which can then act as the Tenant Buyers deposit and thus assist the Tenants in obtaining a mortgage product which will enable them to complete the Purchase during the ‘Back End Option’ period. Records of these payments should be retained by all parties as the Tenant Buyers mortgage lender may require evidence of any payment when the Tenant Buyer seeks to obtain a mortgage.

Your Solicitor will need to take care to ensure that the provisions for exercising the ‘Back End Option’ agreement are in accordance with the ‘Front End Option’. Similarly, any break clauses should be replicated in both Front and Back End Options so that you are not prohibited from honouring your obligations.

The AST and Options should also contain a provision that should there be a breach of the AST then there is a right to seek not only possession but that it also acts as a ground to terminate the Option. For this reason, we would also suggest that only a 6 month AST is entered into with a Tenant Buyer with a right to renew on a six monthly basis for the entirety of the Option Period should there be no breach of the AST and Option Agreement by the Tenant Buyer.

Those who currently own a portfolio may also market their properties on the letting market to Tenants looking to occupy under an AST with an Option to buy for a set price during the Option Period. This gives many of the same benefits described above in terms of distinguishing yourself from other Landlords and attracting longer term tenants who will maintain the Property to a higher standard.

Exercising the Option

Correctly prepared Option Agreements will contain a mechanism to exercise the Option and proceed to the purchase of the Property at the agreed price or by an agreed formula ie/ a percentage of the valuation. This will usually entail a form of notice being given by the purchaser with completion to follow a specified time thereafter. Our already having obtained a signed Transfer document from the vendor at the outset will assist with this as their signatures will be required on the proscribed Transfer form.

Many of my clients have indicated that they are happy to discuss their experiences with others. We are happy to put you in touch upon request and obviously free of any charge. We are also more than happy to answer any questions that any of you may have or to work with you on any of these deals that you may secure or any other types of deals.

Conclusion

This is intended to be an overview of the scheme to allow investors to understand the concept and how it may work for them. Again, none of the content herein should be interpreted as offering advice or as being exhaustive of all of the issues. You should take comprehensive legal advice before taking any action. There are a number of complex issues that may arise not covered in this over view but which we will be able to guide you through.

M S Law LLP are a niche Property Law firm and act in all property related matters for property investors and are the investor’s choice of law firm. We have acquired a large amount of transactional experience in a the Lease Options sector. Should you be able to agree terms with a vendor or tenant buyer then we will be able to prepare, draft and complete all of the relevant paperwork to legally protect your agreement and fully advise you at all stages.

My contact details are:

M S LAW LLP
383 Bury New Road Prestwich Manchester M25 1AW
Tel: 0161 772 4500
Email: info@ms-law.co.uk
Web: www.ms-law.co.uk