Surprise ruling shocks landlords

When Colin Gregory was in financial distress his neighbours David and Sheila Harding agreed to buy his property and rent it back to him at an agreed rent of £800 per calendar month. The property was acquired for £143,000 back in 2001 using a buy to let mortgage arrangement. Only last year Mr Gregory was given the chance to repurchase the property for £60,000 less than its market value at the time of £310,000. Unfortunately the one year timescale expired although the Hardings did manage to find a buyer for the property. However, what happened next was a complete surprise.

New buyer, new landlord

Despite the fact that the new buyer was willing to rent the property back to Mr Gregory they were looking to pursue a £400 a month increase in rent to a “current market value” of £1200 per month. The tenant refused to entertain the increase and the case went to the Brighton County Court.

While there is no doubt that the property was acquired for less than the market value and a life tenancy was agreed, the judge ruled that the tenant was entitled to a 90 year lease at a fixed rent for the entire term. So, in theory the judges ruled that the rent should remain at £800 per month for the next 90 years. Even though the property was conditionally sold at in excess of £300,000 a rough 20 times rental value suggests a figure of just £192,000 which is well short of the “actual market value”.

What was this ruling based upon?

There is no doubt that the solicitors for Mr Gregory gave him exceptional value for money citing the 1925 Property Act and the 1948 Bannister V Bannister case where a lady was given the right to live rent free after selling a property to her brother for less than the market value. While no details of the actual rental agreement have been released, to rub salt into the wounds the Hardings were also ordered to pay Mr Gregory’s costs of £11,000.

While the landlords were refused the right to appeal, many experts believe that they can appeal this ruling under a variety of different technicalities. There was also some confusion because the original 1948 ruling was under a whole different environment where assured tenancies did not exist, with all tenancies at the time protected. There is also some speculation as to whether the tenant is behind on his rent which could in theory allow the landlords to begin eviction proceedings.

Knock-on effect

It seems unlikely this is the end of what is turning out to be a very complicated and potentially damaging case for the sector. Technically the landlords could be in breach of their buy to let arrangement, how might this affect other sale and rent back agreements and how many other similar cases will now emerge in the courts?

In what seemed to be a relatively simple court procedure, the Hardings were advised by their solicitors they should win the case with no difficulties. Instead it looks as though the Hardings will be left with a property effectively valued at less than its market rate, a tenant with a 90 year lease at a fixed rent of £800 per month and their dream of moving to Spain in tatters. We will continue to watch developments surrounding this case with many in the industry looking to assist and “revisit” what some experts believe to be a bizarre ruling. Until details of the rental agreement have been released it is difficult to say with any great certainty what the grounds were for this extremely damaging ruling, with no right of appeal.

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