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William Nassau-Lake
William Nassau-Lake,
Flippin’ mortgages!!
05 April 2017

When assembling sites, it is not uncommon for a developer or land trader to acquire land which is not strictly needed for the intended development. An example of this is where a landowner refuses to sell just vacant land (a garden for example) but insists that the developer must also acquire the related dwelling as well.

Acquiring the dwelling as well as the garden will present difficulties to the developer in respect of cashflow and additional SDLT (the additional 3% rate will apply). Despite this, developers may be willing to proceed on the basis that the developer sub sells (or “flips”) the dwelling to a third party purchaser simultaneously with completion of its purchase thereby allowing the developer to retain the garden.

The “flip” can be structured in a number of ways. The most common is the use of a back-to-back sale and purchase (which involves two simultaneous but separate transfers; the first transfer consisting of the dwelling and garden from the landowner to the developer and the second from the developer to the ultimate purchaser consisting of just the dwelling).

Alternatively, the flip could involve a single transfer from the landowner to the ultimate purchaser of the just the dwelling which is undertaken at the direction of the developer – assuming that the purchase contract allows.

If structured properly, the flip of the dwelling could take advantage of the SDLT "pre-completion transactions" (PCT) rules which are commonly referred to as sub-sale relief. The disposal of the dwelling would also avoid adverse cashflow impact.

So far, so good….

Recent changes in the residential mortgage market caused by the ever increasing threat of mortgage fraud has changed the approach taken by residential “retail” lenders in their willingness to engage with sub-sale transactions.

Many, if not all, residential retail lenders now refuse to provide finance where the buyer acquires the property as a result of a sub-sale.

Despite the genuine commercial reasons for the sub-sale, lenders remain unwilling to lend in these circumstances. The reason for the refusal is that the lenders require that either: 

  • The seller has been registered as the proprietor of the property for more than 6 months prior to completion of the purchase (ruling out a back to back sale) or
  • The identity of the seller referred to in the contract is the same as the transferor referred to in the transfer to the ultimate buyer (therefore ruling out a transfer at the developer’s direction).

These requirements are being rigidly enforced by the lenders with the consequence that sub-sales are becoming increasingly less likely to occur unless the developer is able to find a cash purchaser or a purchaser with funding that does not rely on traditional residential retail lending.

In the scenario give above, the failure of the intended sub-sale may result in the developer finding itself being required to acquire the dwelling and pay significantly higher SDLT which will be calculated on the total consideration for the dwelling and garden and which will also attract the additional 3% rate.

Practical Advice

The approach taken by the residential retail mortgage lenders presents a significant concern for the unprepared developers acquiring sites with ancillary dwellings where those dwellings are not needed for the proposed development.

This could have a significant cashflow impact, result in significantly higher SDLT payments as well as result in the developer retaining the dwelling for at least 6 months following completion and thereby exposing the developer to house price fluctuations. The options available to developers and land traders are: -

  • Reduce the re-sale price of the dwelling to provide incentives for buyers to alternative lending sources.
  • Identify alternative lending sources prior to marketing the dwelling. Inform the agent that specific funding arrangements are required or that only bids from cash purchasers will be considered. Start marketing as early as possible.  
  • Refuse to acquire the dwelling from the landowner and insist on acquiring only the garden.
  • Reflect the risks of the added costs in the price to acquire the dwelling and garden.
  • Retain the dwelling and arrange a short term tenancy to generate an income until re-sale. This will not overcome the increased SDLT liability (note there may be tax implications and VAT recoveries may be affected)

The dialogue

Please tell us if you know of recent examples of traditional residential retail lenders lending to sub-sale purchasers in these circumstances or you know of any reliable alternative funding sources that could assist a sub-sale purchaser. 

For more information or to find out about how the Development and house building team can help you please contact Will Nassau-Lake on 0118 952 7246 or email [email protected].

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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