Beware of Unregulated Residential Lease Option Contracts

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Posted in:Property and Construction, Real Estate|December 8, 2011 | Join the mailing list

In the current economic market home owners are turning to alternative schemes in order to rid themselves of the financial burdens that owning a home brings.

One of the most common options is that of sale and rent back schemes whereby effectively home owners sell their homes to property agents (thus releasing the capital) and then renting it back for a specific period of time.

A lesser known similar scheme is also currently on the market known as a Lease Option Contract, whereby a company effectively takes over the running of your home , pays your mortgage and rents the property out to tenants over a specific period of time. The
company may then make an offer to purchase your home or return it to you dependant on its market value upon the expiration of the agreed period.

In the current climate whereby people are increasingly feeling the pinch, or want to downsize but have not managed to sell their properties (or do not wish to at a low value) this can be an attractive option , however it comes with a number of risks.

One couple who entered into such a scheme were contacted after a few months by their credit card companies reducing their credit limits, which prompted them to investigate their credit ratings. They discovered that the company who had effectively taken over
their house had failed to pay their mortgage and their home was due to be repossessed by the bank.

Furthermore the couple found themselves in a situation whereby they could not afford the rent on their current property alongside their mortgage payments, nor could they move back to their home as tenants were in situ under a fixed term tenancy agreement. As
a result when their property is sold at auction by the bank, the couple will be responsible for the £30,000 – £40,000 shortfall on their mortgage and the company who ‘took over’ their home have now gone under.

The main issue with residential lease option contracts is that the system is currently unregulated, meaning that unregulated investor companies can propose and enter into the schemes with limited legislation protecting homeowners, so those in a similar position
and especially in the current climate are being warned to stay clear even though the original proposal may look seemingly attractive.

To discuss how we can provide further advice in connection with these issues, please contact Ian Barker, Partner and Head of our Real Estate team, by email to ianb@berg.co.uk or alternatively you
can call Ian on 0161 833 9211.

The information and opinions contained in this article are not intended to be comprehensive or to provide legal advice. No responsibility for article’s accuracy or correctness is assumed by Berg or any of its partners or employees.
Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of the contents of this article.

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