A trap for the unwary: residential sale and rent back arrangements

An unwary residential developer could fall foul of strict financial services legislation. This was put in place to protect struggling individuals from unscrupulous companies seeking to take advantage by offering to buy their home (often at an undervalued price) and rent it back but has wider implications.

The general prohibition in the Financial Services and Markets Act 2000 ("FSMA") requires anyone who conducts a regulated activity to be authorised by the Financial Conduct Authority ("FCA") unless they are exempt. Developers may be unaware that entering a sale and rent back arrangement with an individual seller could breach this general prohibition with criminal consequences. 

This is the case even if the developer believes they are doing the seller a favour by allowing them to remain in their house for a period after completion for practical reasons. On part exchange, the developer may want to allow the seller time to move or, on a new site, allow the seller to reside until development commences.

When do sale and rent back agreements fall within the UK regulatory perimeter?

Subject to some exceptions, sale and rent back agreements are regulated arrangements if:

• Land is purchased from an individual seller (or a trustee if the person remaining in occupation of the land is an individual).
• After the sale the individual (or a related person) is entitled to occupy at least 40% of the land as a dwelling or connected to use as a dwelling.

"Arrangement" is not defined, and a broad interpretation should be adopted. Caution should be exercised as it captures arrangements in one or more instruments or agreements and could cover any circumstances designed to avoid the regime.

The regulated activity which is prohibited by the general prohibition is arranging, advising, entering into or administering a regulated sale and rent back agreement. Anyone doing this by way of business must be authorised by the FCA to carry out this type of activity. Whether a transaction is "by way of business" will depend on the surrounding commercial circumstances. FCA authorisation is a lengthy and costly process and so isn't usually a desirable option.

Implications

Breach of the general prohibition is a criminal offence but there are also reputational risks given the publicity unauthorised conduct of regulated activities attracts. 

Developers should be aware of this legislation and carefully consider how to avoid this trap. It is a point to be worked through whenever a residential sale and rent back arrangement is proposed.

Foot Anstey advises on the implications of this legislation and the related financial services guidance. Please get in touch if you wish to discuss this issue further.