There
are two aspects to the scheme. Either part can be
used independently of the other or used together.
For simplicity, I 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 vendor’s 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. 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.
I
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:
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 already have, i.e. if you have a five
year Front End Option you will not be able to grant
a seven 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, i.e. if you are paying £500 per month
for the ‘Front End Option’ but secure
a Tenant Buyer who will pay you £600 per month
for a ‘Back End Option’ then the profit
derived here is £100 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 £90,000 but under the ‘Back End
Option’ £110,000 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 I 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 i.e. 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 prescribed Transfer form.
Many
of my clients have indicated that they are happy to
discuss their experiences with others. I am happy
to put you in touch upon request and obviously free
of any charge. I am 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.
