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Article > Rent to Own Overview

 

This article is kindly provided by Shimon Rudich

www.ms-law.co.uk


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:

  • In combination with the Front End Option (commonly termed the ‘Sandwich Option’)
  • 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 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.

 


MS Law LLP is a niche Property Law firm and act in all property related matters for property investors. We have acquired a large amount of transactional experience in 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.

By way of background, I am a founding Partner at MS Law LLP and act exclusively for property investors. I am at the forefront of the new strategies and techniques in the property sector, e.g. Lease Options, Rent to Own, etc. My firm has established a market leading reputation in acting for property professionals and entities and we are recommend by many of the most famous property experts/gurus such as Rick Otton, David Lee, Parmdeep Vadesha, Hanif Khan, Richard Shepherd, Vanish Patel, Simon Zutshi, Rob Moore, Mark Homer, Paul Galbraith, etc.

In the past few years I have also acquired extensive experience in setting up, acting for and advising a number of Bridging and Lending Companies. My tasks have varied from approving lending facilities to negotiating business terms and conditions with institutional banks and underwriters and I am now the sole appointed Solicitor for some of my Bridging Companies clients.

I am also a successful property investor and offer my clients practical know how combined with technical knowledge on the latest property schemes and techniques in order to actively contribute to my clients financial success.

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.

MS Law Solicitors

Tel. 0161-7724500
Fax. 0161-7724501
Email. Shimonrudich@ms-law.co.uk



 

 

 
 

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