Is a SARB storm brewing?

Lenders, asset managers, Law of Property Act (LPA) receivers and lettings agents may be unwittingly walking into a sale and rent back (SARB) regulation storm after 1 July

Whilst the impact on letting agents may be more immediate, the lack of publicly available information on regulation of the sale and rent back sector by the Financial Services Authority (FSA) means that many agents may be completely unaware that they could be committing a criminal offence by administering a SARB tenancy post 1 July.

The FSA has recently issued its near final rules on regulation of the sale and rentback sector outlining that letting agents who “perform functions such as collecting rent from an agreement seller are required to be regulated.”

Certain agents can be excluded from regulation by allying their business with a regulated SARB provider and this will work well for tenancies post 1 July. The problem however, will really come with retrospective regulation on existing tenancies which could easily be dragged into a regulated environment and bring the agent into breach.

This problem is going to be exacerbated for lenders, LPA receivers and asset managers who are managing buy-to-let properties for landlords in default – especially where those landlords have entered into a SARB agreement when they first bought the property.

Wright & Wright believes that several lenders have already been involved, knowingly or otherwise, in this sector and even if fraud is proven on the part of the landlord for a failure to disclose the existence of SARB, lenders will still have the core duties to protect the consumer to consider under the interim regime. There is the underlying concern that these lenders may not carry the appropriate permissions to entertain any activity in SARB.

I have heard that some lenders will view these cases as a breach of the mortgage agreement and all tenants would have to be switched to a proper assured shorthold tenancy. This may seem a reasonable decision but will be very dangerous post July.

Moving to a different tenancy or varying the existing terms will be a substantive variation of the original SARB agreement and will drag the parties into conducting a regulated activity.

Failure to vary permissions to administer SARB will mean, in just over a weeks’ time, that a lender, receiver or otherwise will commit an offence.

Julian Sampson is partner at Wright & Wright