Depending on how you came about the concept of property lease options, depends on why you’re reading this article. If you’ve been presented with the idea of a lease option on your property, you may be looking to see if it’s legal.
In fact the ‘options‘ element of the lease option contract has been around since the dawn of property. Options have been used by many developers to secure properties, but mostly in the commercial property sector. Whereas now lease options are commonly used with residential properties too.
Are lease options legal in the UK
The concept of lease options for residential property is relatively new in the UK. But since around 2010/2011 there has been a bit of an explosion of lease option companies and investors offering them to residential home owners.
There has also been a number of seminar companies and individuals teaching lease options. Many of them are claiming that lease options are the next way to get rich quick.
What is the basic concept of a lease option and what makes it legal?
The basic concept of a lease option contract means that a ‘buyer‘ (i.e. the lease option company or investor) pays you an upfront amount (i.e. the option fee) so they have the right to buy your home in the future. This is whilst they pay you a monthly rent to cover your mortgage (i.e. the lease).
Both parts of this contract, that is the ‘option‘ part and the ‘lease‘ part are both legal contracts in the UK. What has happened in relation to a lease option is the bringing together of these two forms of legally binding contracts into one single contract.
These contracts are drawn up by a solicitor, assuming you use a reputable lease option company. You must also be separately represented by a solicitor who is experienced in lease options.
You may want to ask your existing solicitor about a lease option, but it’s likely they may be a bit disparaging about them, as quite often they don’t fully understand the benefits they provide (see below).
Stuck between a rock and a hard place when selling your home
Quite often home owners get stuck between a rock and a hard place. This could be they got into financial difficulty, which may simply be due to redundancy. If there’s been a recent closure of a large business locally, this can have a devastating impact on home owners.
I’ve been watching the news about Tata steel and the redundancies that may happen there at the Orb Electrical Steels factory in Newport where around 380 are set to go at the south Wales steel making plant. This type of thing happens all the time.
It could be you’re faced with mortgage payments and bills you can no longer afford. You may also be facing the prospect of a repossession, but cannot sell your home because the housing market is depressed. A lease option contract is the perfect solution for this type of situation.
In this situation a lease option becomes a win-win for the home owner who’s stuck, whilst giving the investor an opportunity.
But for us it’s not just about the opportunity to make money, it’s more about being able to help a person in distress. Of course we need to make money, as we’re not a charity, but we get pleasure out of being able to help home owners who are truly stuck between a rock and a hard place.
What are the risks of a lease option contract?
There are potential risks to a lease option.
However these risks can be mitigated by choosing the right lease option company or investor. But what are the possible risks?
The lease option company or individual investor defaults on the mortgage payment
As the home owner is still responsible for the mortgage and the payments on it, if the lease option company or investor defaults, this would come back to you.
However, if you choose your lease option company or investor carefully, this risk can be mitigated away.
Lease options are unregulated
Whilst the lease option market is unregulated, this doesn’t mean it’s a bad thing.
There are also regulated markets where rogues exist. I only need to mention the PPI scandals from the highly regulated banking sector to make this point.
Once more, if you choose a reputable lease option company or an investor with integrity, this risk won’t be a problem.
Lease options are frowned upon or misunderstood by most ill-informed solicitors
Whilst there are many solicitors who shy away from lease options, this is quite often because they don’t specialise in this area.
To avoid this risk you must get representation from a solicitor. If you choose a solicitor to advise you about the lease option contract, this is not actually a risk at all. But to protect yourself properly, choose a solicitor who knows about lease options.
Lease options are against the terms of the mortgage
The risk here is that you enter into a lease option with a company or investor who doesn’t explain that you must inform your mortgage company.
Most mortgage lenders are happy with lease option arrangements once they’ve been informed.
The price of the property could rise or fall during the lease option contract period
This shouldn’t be a problem if you arrange the lease option with a reputable company. In the event the price falls, there should be provision in the contract to extend the option period, which is quite normal and legal.
Whereas if the price of the house rises, this is just how things go, but the risk here is taken by the lease option company. But as you know there’s no guarantee that house prices will rise in the future. You have to make a decision whether you are happy with the terms of the lease option. You can’t think in the future with hindsight and wish you’d not entered in to a contract.
Never sign any contract if you’re not happy with the terms, as once signed and the option fee has been paid, this forms a legally binding contract. If you are unsure, don’t sign up to a lease option. One alternative to a lease option is an assisted sale.
Having read this article, you now have a decision to make. You now know that lease options are legal in the UK. You are aware of the risks of lease options and how to mitigate these risks.
In addition to understanding the risks, you also know about the benefits of entering into a lease option contract.
If you have further questions because you’re still unsure, we are happy to help further if you contact us.
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Article written by Russell Bowyer who has been investing in property since purchasing his first commercial property in the 1990's for his own Chartered Accountancy business. But his first property investment project was to turn an old dilapidated restaurant into a large 5-bed home, which he purchased for £117,500 and sold for £450,000 (to see an "after" photo of the house before it was sold see here: About). Russell owns a number of investment properties, which includes houses, flats and HMO's. More recently he has turned his creative side to investing in property using lease options. His largest lease option deal to date was to acquire 12 properties worth over £2 million for just £12, which means he paid just £1 to acquire each property!
