Watch your (lease) back

With delays in planning, materials shortages and increasing costs of labour and finance, developers often acquire sites before they are in a position to begin work on their project. They will rightly look to make alternative use of the site until everything is in place to proceed, and leasing back the site (or a part of it) is a common option.  Developers and lenders should however take care not to find themselves inadvertently carrying on regulated activities, which are caught by the Financial Services and Markets Act 2000 (Regulated Activates) Order 2001 (the Regulations).

We should make it clear from the start of this article that the Regulations are complex and their application will be determined based on the facts of each transaction.

How does it affect me?

A person (a developer in this article) must not carry on activities relating to a sale and rent back of a site unless they are an authorised or exempt person, or an exclusion applies (see below).  It is an offence for anyone who is not an authorised or exempt person to carry on a regulated activity and you may be liable to imprisonment or a fine or both.

At first glance the Regulations appear to only affect the developer.  However, this will be of direct concern to a lender who is funding the acquisition, as a breach of the Regulations could affect the viability of the site, the future development and the developer.

Further, it could affect enforcement as the lender will hold security over a site that is in breach of the Regulations.

What makes a sale and lease back arrangement regulated?

For the purposes of this article a sale and lease back agreement is regulated if, at the time it is entered into:

• The developer buys all or part of a qualifying interest in land (being a freehold or leasehold interest with absolute title) in the UK from an individual (rather than a corporate entity) or a Trust (where the ultimate beneficiary is an individual rather than a corporate entity) (the seller); and
• The seller or a related person (being a spouse, civil partner, “common law” partner, parent, grandparent, child, grandchild, or sibling) is granted the right to occupy at least 40% of the land purchased by the developer as or in connection with a dwelling.

After reading the above, many would draw the conclusion that a work around to allow occupation by the Seller is to enter into separate agreements – one for the sale and one for the lease back.  Unfortunately it is not that easy and the Regulations will apply even where an agreement for the sale of the interest in land is completed separately to the lease back.

Are there any exceptions?

As mentioned previously, the regulations are complex and must be applied to the facts of each transaction.  There are a number of exclusions which could apply, with the main examples being:

• The lease back of the dwelling is less than 40% of the overall site
• The seller is not an individual
•  The land is to be used for the purpose of letting as a dwelling to someone other than a related person of the seller
• The land is used primarily for business purposes
• The land is overseas
• It is a regulated home reversion plan.

In summary, a sale and lease back arrangement is complex and each transaction must be considered based on its own merits.  Whilst developers and lenders should look to make site acquisition and funding arrangements work for them where they can, both must exercise caution when dealing with this type of structure. If you have any questions or need any help with any of the points raised in this article, please get in touch info@ts-p.co.uk.