Citizens Advice welcomes this opportunity to respond to the National Landlords Association consultation document on a code of practice for sale and rent back. The CAB service is a network of 432 independent advice centres providing free, confidential and impartial information, advice and advocacy from over 3,000 locations in England, Wales and Northern Ireland. It provides free, independent, confidential and impartial advice to everyone on their rights and responsibilities. It values diversity, promotes equality and challenges discrimination.
The service aims:
- To provide the advice people need for the problems they face; and
- To improve the policies and practices that affect people’s lives.
In 2007/08 the CAB service dealt with 5.5 million enquiries of which 1.7 million related to debt problems. Citizens Advice Bureaux are also seeing increasing numbers people with mortgage and secured loan arrears problems; the 64,053 enquiries we saw in 2007/08 represented a 24 per cent rise since 2005/06. As sale and rent back agreements are often marketed as a solution for mortgage arrears and other debt problems, we might expect to see more consumers thinking about sale and rent back as a possible option. We therefore believe that a public discussion on standards for sale and rent back providers and safeguards for consumers is both timely and necessary.
For some time the CAB service has been seeing a small but steady stream of enquiries from consumers about sale and rent back (SARB) schemes. For instance, since April 2008 Citizens Advice Bureaux dealt with around 350 enquiries about sale and rent back. We believe that most of these enquiries were from people who were seeking a better understanding of sale and rent back, thinking through the pro’s and con’s and finding out about other options. However in some of the cases recently reported by CABx it is clear that people entering into sale and rent back agreements have suffered severe detriment as a result.
A CAB in Oxfordshire saw a 42 year old woman who had a partner and dependent children. They had got into financial difficulties in the previous year and sold their house to a sale and rent back provider. They understood that they could live in the house for the rest of their lives paying £1,000 rent a month. They had also been told that during the period of their lifetimes there would be nine 'rent-free' months and that they would get £12,000 on sale of house and £36,700 after two years. However they received no paperwork from the company and contacted them to querying this. They discovered that the £36,700 was payable after two years 'when you leave'. The company to whom the house was later mortgaged subsequently went into liquidation and the receivers told the couple that the house would be repossessed and their tenancy agreement would end. The clients had lost £36,700 and faced becoming homeless as well.
A CAB in County Durham saw a 26 year old man who lived with his partner and four children. They were having difficulty meeting their mortgage payments and as a result they sold their house to a sale and rent back provider. But the rent they would have to pay was not established until after everything had been signed for. Only then did they find out that the rent was greater than the original mortgage payments. They were soon having problems meeting the rent. In addition their central heating had been condemned leaving them without heat or hot water for several weeks. The landlord, apart from making verbal threats to evict them, has found 'every excuse' not to repair or replace the heating system.
While cases such as these are very few in number, the catastrophic failure of the sale and rent back deals raises a set of fundamental concerns about the way that providers operate, the deals they offer and the extent to which consumers can be sure that promises and guarantees given by providers will actually be met. Some of these concerns can be summarised briefly under the following headings.
Concerns Information and advice
As the following cases show, consumers considering entering into a sale and rent back agreement need access to full and impartial information about all aspects of the agreement before signing up.
A 60 year old man sought advice from a CAB in Hertfordshire on the day before the possession order on his home was due to take effect. He told the CAB he was in process of selling his house but had no papers with him. By the time he came back with papers there were only two hours left before the bureau closed. On reading papers it became apparent that he was in process of selling his home on a sale then rent back scheme. After speaking to the client’s solicitor it became apparent that the solicitor had not explained to the client the full implications of what was about to happen. It was also apparent that the solicitors had not ensured that client had signed a disclaimer saying he had understood he was selling his house at a price well below market value. With the very fierce time constraints on advising (solicitor said client had less than an hour to attend a local solicitor to sign a disclaimer otherwise possession order would take effect the following morning), there was little the bureau could do but tell him the facts of the matter.
A CAB in Tyne and Wear reported that a woman sought advice after three failed suicide attempts due to worry over money problems. She and her partner had sold their house 18 months ago for £58,000, but now all the money had gone and they could not afford the rent of £405 pm or the council tax. The client told the CAB that they had never been told before selling their home how the house sale might affect their entitlement to benefits in the future, especially housing and council tax benefit which they cannot claim for five years. They had been surviving on their child benefit and the husband’s disability living allowance.
In particular people considering entering into a SARB need sufficient pre-contractual information to:
- both understand the nature and consequences of the proposed SARB agreement.
- compare the costs and benefits of a proposed agreement with either another SARB agreement or a different option for dealing with their debt problem (if this is the reason for their interest in a SARB agreement)
- decide whether it is an appropriate way of dealing with debts.
- Understand possible housing benefit restrictions.
Citizens Advice also believes that the sale process for a SARB agreement must also include a proper investigation into whether the people entering the agreement will be able to afford the rent payments under the proposed agreement.
Content of the deal and conduct of the provider
Citizens Advice considers that there are a number of issues which are vital for providers offering SARB agreements to consider if consumers entering into SARB agreements are to get a fair deal:
- Whether the discount to market value is reasonable and how consumers would know this.
- The level of security of tenure offered and what guarantees providers give about security of tenure. In particular, we believe that providers should give commitments not to use the Section 21 procedure against their tenants to obtain possession of the property and not to use mandatory possession grounds in response to relatively minor breaches of the rental agreement.
- The tenancy agreement should clearly set how the provider can increase rents and impose reasonable restrictions on this.
- Whether providers carry out their duties as a landlord in a reasonable and non-exploitative way.
- Whether SARB providers offer any effective guarantee that promises about continued occupation, options to buy back or cash back deals will be honoured, and whether consumers are given any sort of indemnity against a provider’s failure to meet these promises.
Here are a few recent cases which illustrate the detriment caused when SARB providers do not offer these guarantees:
A CAB in Yorkshire reported that a retired couple in receipt of a state pension, pension credit and disability living allowance sold their home which they had acquired under right to buy legislation to a SARB provider to pay back credit debts they had accumulated. They were paid £53,000 for the property, which was worth around £90,000. The company promised to pay them a further sum in ten years time. However the sale did not clear the credit debts in full, and the clients were struggling to survive and pay their creditors because they were not entitled to housing benefit for five years.
A CAB in Lancashire reported that a retired couple, one of whom was disabled, sold the home they had owned for 30 years to a SARB provider to carry out improvements. After sale of house they were given a six month assured shorthold tenancy. This agreement has now expired and the landlord wanted to increase the rent from £450 per month to £650 per month. The clients could not afford the rent increase.
A CAB in Northumberland reported that a woman who had bought her council house a few years ago for £68,000, sold her home to a SARB provider when she got into financial difficulties. The SARB company valued her house at £125,000. She received a lump sum of £7,200 and rented the property from them for £593 a month. Unfortunately, the client got into financial difficulties again and in February 2007 the SARB provider obtained possession. However the client has yet to receive the £31,435 from the sale of the property which had been retained by the SARB provider. She had to instigate legal proceedings.
A CAB in Surrey reported that a lone parent sold his home to a SARB provider when he got into mortgage arrears. He had been referred to this company by his local authority. The client told the CAB that he had been promised a lifelong tenancy and a cut of the equity if the house was ever sold at a profit. The company held back £40,000 from the purchase price. At the end of 2007 he started to get correspondence marked for “The Occupier” referring to court action for mortgage arrears. He contacted the SARB provider who reassured him that everything was being sorted. After some weeks, the SARB provider told the client that they were selling property to someone else. Unknown to the client, the SARB provider had gone into liquidation. In January 2008 the new landlord visited the client and asked him to sign a new tenancy agreement which increased the rent from £880 to £1,350 per month. The client contacted the council who advised he did not sign the agreement, and the rent officer carried out a pre-tenancy determination. The eligible rent was set at £1,150 and the council started paying HB to the new landlord from February 2008. However, it appeared that the landlord did not pay the mortgage as the lender started possession action. The client attended the court hearing at which the landlord claimed he had never been paid any HB. It also transpired that the lender did not know the property was tenanted and had given the landlord a residential mortgage. The court made an outright possession order. The client, who was unemployed, was now facing eviction by the lender, and the loss of £40,000, in addition to the charges levied by the SARB provider when they purchased the property. He was worried because his children were doing very well at school, but might have to move if he was offered temporary accommodation out of the area.
As these cases show, improper conduct by a provider in any of these areas can lead to serious problems for consumers. Citizens Advice therefore believes that the SARB sector needs clear and binding standards to control both the practices of lenders and key features of the deals that are offered. Our preference would be for such controls to be contained in an effective statutory licensing system, given that many of the problems we have seen involve either small suppliers or suppliers that subsequently become insolvent or cease trading. Voluntary regulation may not be very effective at controlling such providers or protecting consumers in these circumstances.
Nevertheless, if sector trade associations can develop effective standards through a code of practice that would be binding on their members, consumers will have better safeguards than they have at present and will be much better equipped to recognise rogue providers. Therefore we warmly welcome this initiative by the National Landlords Association. Our comments on the proposed code of conduct for SARB landlords are set out below. We hope that you find them to be useful and constructive.
Responses to the consultation questions set out in the notes for consultation process.
Para 4.1: Is the definition of ‘sale and rent back transaction’ sufficiently clear and broad.
The definition seems sufficiently clear. We have no reason to believe that a three-month period between sale and subsequent rent back would be sufficient, but this should be monitored for exceptions. Applying the definition to the owner’s main home seems reasonable. There may be circumstances where the main home is not the only home (it is not impossible that a borrower might have a ‘second home’ that is also about to be repossessed) and the definition should be flexibly enough to deal with unusual situations.
We would raise a question about the definition of the term ‘buyer’. A firm promoting and arranging SARB agreements along with a ‘client’ landlord could, if they wanted to, avoid the provisions of the code by a ‘double sale’ whereby the arranging firm purchases the property and then re-sells to the landlord providing the tenancy. Some of the evidence we receive from bureaux suggest that this is the case. We therefore believe that the definition of ‘buyer’ should be capable of covering business relationships between a landlord and arranging firm.
Para 4.2: Should members have a training requirement?
We believe that a requirement on subscribers to ensure staff are properly aware of the content and meaning of code requirements is a necessary condition for the success of the code. Therefore we would support such a training requirement.
Para 4.3: Defining the vendor as a ‘customer’
Citizens Advice would support this definition. A SARB agreement creates a complex and potentially long-term relationship between the vendor and the provider/landlord. The notion ‘customer’ implies the need for providers to treat the other party with due care on a continuing basis.
Para 4.4: Member responsibility for third party actions
We would strongly support an approach that makes code subscribers primarily responsible for the actions of any third party agent carrying out activities on their behalf. It is vitally important the code subscribers are not able to simply contract out of their code commitments.
Para 5.1: Are the advertising requirements clear
The adverting requirements are clear, but we would highlight what we believe to be the following limitations:
Firstly, paragraph 4.2 states that adverts and promotions should contain clear reference to the code, but there is no detail on how this should be done. Paragraph 2.3 allows subscribers to use NLA branding, but again provides no detail. Part of the utility of a voluntary code of practice is in the way it can provide consumers with a clear quality mark to help them differentiate code subscribers from other providers. Therefore the code should require subscribers to display code ‘badging’ in promotional material and likewise clearly forbid use of the code badge by providers that do not meet the standard.
Secondly, paragraph 2.1 and 2.4 requires subscribers to comply with existing regulatory and industry standards but goes no further than this. Citizens Advice believes that argue that to be effective, a code for SARB transactions should go further by address concerns specific to this sector. This might include prohibitions on certain phrases of suggestions in adverts, for example, about entitlement to housing benefit. It might also mean developing a common format for information that should be presented in adverts so that consumers can differentiate between the products of different providers. Citizens Advice suggests that the NLA might like to look at the OFT’s debt management guidance as a model for this. This sets out in detail minimum standards which debt management companies have to meet in order to show they are fit to hold a consumer credit licence. For example, the guidelines require advertising for DMCs not to state or imply that the service will free the consumer of the need to meet their debts, and not to emphasize the ‘savings’ to be made by rescheduling debts without making it equally clear that this will usually lead to an increase in the size of the sum to be repaid and that rescheduling the debt may impair the consumers’ credit record.
Another example of such an approach would be the statutory rules on credit advertising where the complexity of products, long term obligations and potential for consumer detriment justify a more prescriptive approach to the form and content of adverts which includes standardisation of key information, price comparators and control of certain terms. We believe that the nature of SARB transactions justifies a similar approach.
Para 6.1- 6.9: Do we agree that there are sufficient requirements for provision of information etc?
Citizens Advice supports the following information requirements in the draft Code:
- Paragraph 3.1.1 on Status disclosure and provision of code
- Paragraph 3.1.2 on Contact details
- Paragraph 3.1.6 on offers to purchase conformed in writing clearly showing any discount to market value.
- Paragraph 3.1.7 on the provision of an ‘NLA Rent Back Certificate’, but only points a), b), d), e), f).
We do not support the following requirements:
3.1.3 - We believe that this code needs to go very much further than requiring firms to provide information in good faith. This only really confirms the duties that providers would have under existing legislation (such as the Consumer Protection from Unfair Trading Regulations 2008) and places the burden of proving compliance on to consumers who would have to challenge any lack of good faith. Instead we believe that this code needs to establish positive duties on subscribers as to the form and content of information they provide.
There are two aspects to this. The code should firstly ensure that consumers are given all the information they need to understand the transaction, to weigh up the costs and benefits of the transaction and to understand whether the proposal offers a solution that is suitable for their needs.
Secondly the code should require this information to be set out in a standard way so that consumers might both readily understand the information and be better able to compare the proposals of rival SARB providers. This suggests that the code sponsor needs to include some form of key facts illustration. It also suggests that the code sponsor needs to develop some standard cost comparators so that consumers can assess different SARB proposals.
3.1.4 – We do not support this requirement for the same reasons as para 3.1.3. Requiring firms to comply with the Unfair Terms in Consumer Contract Regulations 1999 might add something in terms of access to redress under the code, but as providers are required to comply with this in any event it adds little else. The code needs to develop a more positive duty setting out the way that key terms are set out.
3.15 – We do not support the current wording of this requirement which does not provide consumers with adequate protection. All it requires subscribers to do is make it clear that customers are free to take independent legal advice. All a provider has to do in the course of a ‘hard sell’ is get the consumer to undertake that they have been advised to take legal advice. This is likely to be a very ineffective safeguard for consumers under extreme financial, emotional and time pressures.
Many of the concerns we set out in the introduction above centred on the need for adequate explanations and advice. Consumers are unlikely to be aware of all the available options for dealing with a debt problem (or indeed for equity release) and are unlikely to appreciate the possible consequences of a SARB transaction in areas such as future benefit entitlement or any bankruptcy application they might make if the SARB does not deal with all the debts / financial problems.
We strongly believe that the code should require SARB providers to ensure that their customers have received sufficient independent advice and explanation to make a proper informed decision about entering into a SARB transaction. Merely informing consumers that independent advice exists goes nowhere near meeting this duty.
However we would support the part of 3.1.4 that makes it clear that customers do not have to use legal or valuation services suggested by the SARB provider to complete the transaction.
We do not support paragraph 3.1.7 c) on the same grounds.
Paragraph 7: Business leads
We would support the proposal that a code subscriber should not sell leads on to non members, as consumers might well be attracted to the transaction by the promise of protection and may not clearly understand that they do not get the protection of the code if the lead is sold on.
We have no particular comment on the proposals for reliance on the NLA Rent Back Certificate, as this seems to offer limited protection for the reasons stated above.
Paragraph 8: Creating the tenancy
We would support the notion that the purchase and rent back should all take place within the same transaction. This would help to deal with the evasion concerns we raised previously.
We would broadly support the requirements set out in paragraphs 3.3.2 – 3.3.10 with the following reservation. Paragraph 3.39 aims to constrain the way that subscribers can increase the rents they charge SARB customers by reference to the prevailing RPI. However, this constraint could be weakened by the way that paragraph 3.39 allows subscribers room to exceed RPI as long as this is not significant. Firstly we believe that the word ‘significant’ requires a definition. For lower income households any rent increase is likely to be significant. Secondly, to prevent abuse of the exception clause in 3.3.9, paragraph 3.3.10 gives the tenant a right of appeal against any increase above RPI. However, we believe that many consumers (and the more vulnerable consumers in particular) will not actually use this appeal mechanism.
If the code is to allow subscribers the possibility of increasing rents above the RPI level, then perhaps a better safeguard for customers would be a requirement for the subscriber to gain permission from the code sponsor to do this. The onus would then be on the SARB provider to prove why an above inflation rent rise was justified, rather than on the customer to prove why it was not.
On the subject of rent rise, we wonder if the pre contractual information about the level of rent should include some ‘sensitivity testing’ to show a prospective customer how rents may increase over time. Providers should not assume that a customer’s ability to afford rent payments would survive any increase in rent.
Paragraph 9: Maintaining the tenancy
Citizens Advice would broadly support the measures set out in paragraphs 4.1 to 4.4.
While we would prefer that SARB customers were provided with an assured rather than an assured short hold tenancy, we understand that SARB providers operate under the conditions set by their funders. Therefore we particularly welcome the commitment in paragraph 4.4 that subscribers should not use the Section 21 procedure to gain ‘no fault’ possession.
However the code is silent on the use of other mandatory possession grounds, and on ground 8 in particular. Of course we acknowledge that landlords must have the right to take appropriate action against tenants where the later seriously breach the conditions of the tenancy. However ground 8 can be invoked in situations where the rent arrears are nor necessarily that serious and result from a temporary financial difficulty experienced by the customer that is can be resolved (perhaps with a little help).
SARB agreements are often specifically marketed at people in serious financial difficulties and some of the reasons for these difficulties (variable income, job insecurity, intermittent illness, poor money management skills etc) are very likely to continue after the SARB transaction. Therefore it seems wholly unreasonable for a SARB provider to seek possession on a mandatory ground for relatively minor rent arrears. It is not difficult to see the scope for severe consumer detriment arising from this. Therefore we believe that the code should commit SARB providers to refrain from seeking possession under ground 8.
We would also like to see the provisions on possession proceedings to be fully aligned with the current pre action protocol for landlords in possession actions.
Paragraph 10: Records
We broadly support the provisions in paragraph six of the code that relate to record keeping.
Paragraph 11: Complaints
We would broadly support the proposals for subscribers’ in-house complaints procedure. The only comment we would have here relates to paragraph 7.1.3 c) on time scales. We do not think that reference to ‘reasonable’ time scales is sufficient. The code should specify a time scale with which SARB providers must comply.
Paragraph 12: Conciliation
We have three brief comments on this section of the code.
Firstly, the conciliation process seems to involve two stage following the provider’s in-house complaints procedure with complaints forwarded to conciliation and then(if the compliant is not resolved) to an independent redress scheme. We wonder whether both these stages are needed and whether the complaint should simply forward to independent redress as would be the cases with the complaints system for firms regulated by the Financial Service Authority or Office of Fair Trading for Consumer Credit. If you would like the trade association to provide intermediate conciliation, then a time scale should be set out for this. The NLA conciliation process should also contain a facility whereby the customer’s complaint can be forwarded on to independent redress automatically, rather than being returned to the customer. Otherwise there is a danger that an aggrieved customer will simply give up through ‘complaints fatigue’.
Secondly the code gives no detail about the independent redress scheme. Such detail should be included in the final code.
Thirdly, the code should contain a requirement for a subscriber to hold any enforcement action that may be pending against a customer pending the outcome of any complaint that may be material to that action.
Paragraph 13: Non-compliance
We have three main comments on this section of the code.
Firstly we note that paragraph 8.2 of the code places the onus on customers to write to the disciplinary board. The customer is given a one-month deadline to do this, which seems wholly inappropriate where the purpose is to alert to code sponsors to possible bad practice rather than seeking redress per se. Also we are not sure why allegations of non-compliance should pass through the providers in-house complaints procedure, as we would have thought that the NLA would want to encourage customers to report serious non-compliance as soon as possible. Corrective action or sanctions by the code sponsor is a different matter consumer redress but this seems confused in this part of the code.
Secondly, as a general point the code is silent on compliance monitoring other than in telling consumers how to report non-compliance. We would hope that the code would contain a commitment for pro active compliance monitoring by the Disciplinary Board.
Thirdly the code is silent on how consumers might seek redress against a SARB provider that goes out of business or decides to leave the code scheme rather than comply with a sanction. We are particularly concerned with the cases we have seen were SARB providers have become insolvent, failed to keep up with their mortgage payments or both. In these cases consumers have lost the right to occupy that they had paid a considerable amount for and in some cases lost the right to a possible ‘cash back option’ in the future.
These situations cannot be adequately dealt with by the compliance procedures set out in the code. Instead we believe that providers should be required to provide a bond or insurance against this eventuality. We wonder whether the NLA will take steps to introduce such a requirement into this code, or will seek to establish a collective compensation scheme under the code, perhaps funded by contributions from members or will provide some other form of binding guarantee.
Consumers will seek to rely on this code as a measure of the financial stability and probity of the code subscribes. If this cannot be guaranteed by the code process then the code must require SARB providers to make it very clear that the promises they offer their customers are not backed up with any specific guarantee.
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