When you decide to grow your portfolio you need to choose a strategy which suits your needs and requirements. At MS Law we understand this and we use various methods and strategies to meet your expectations and plans.
Two of these methods are Lease Options and Delayed Exchange and Completion, which offer similar benefits, but with some keys differences which can drive your decisions.

What are Lease Options and Delayed Exchange and Completion ?

Well, both are powerful tools in building up your portfolio and benefitting from the property market through market rises or through improvements to the Property, without actually having to complete a purchase until some time in the future. Both also allow you to take control of a property from a Seller, to manage the Property, possibly put a tenant in the property generating rental income for you to keep, whilst you pay the current owners’ mortgage and benefit from mortgage rates which may better than current ones available.

Both methods also involve a contract. The key differences are flexibility and commitment. An Option is a one way commitment where the Seller must sell if you want to purchase. However, you don’t have to purchase, instead you only commit to purchase by serving a notice confirming you want to. If you don’t serve a notice before the end of the Option then you can walk away. However, you usually lose all payments made up to that point, depending on how the Option is structured this could be just a £1.00 option fee and mortgage payments made from rent received, so you are still in positive cash flow and in profit ! However, if you have invested significant amounts in improving the property or in upfront payments you can be out of pocket but you still have flexibility.

A Delayed Exchange and Completion however is similar to a normal sale contract which binds and commits both the Buyer to buy and the Seller to sell. The difference between this and a normal purchase however is the gap between exchange and completion which can be much longer than normal for example 1 year, 2 years, 5 years or however long you want. However, you are committed to purchase by the contract and cannot usually walk away without facing severe penalties. Sellers tend to like the sound of this method better as they think they have a better commitment from you but it is often not as flexible in respect of your obligations.

There is no longer a legal restriction on how long either an Option or a Delayed Exchange and Completion can last however, you need to think about practical points for example, how long does the Seller’s mortgage last for, when will you have the finances to purchase, do you need mortgage finance and what happens if lending conditions change, is the Seller elderly and would their death lead to difficulties.

Another key difference between the two methods is the Stamp Duty Land Tax (SDLT) treatment. With Delayed Exchange and Completion if keys are handed over on exchange, even though there is not transfer of title, SDLT will be payable at that time if the purchase price is above £125,000. Here, SDLT will be payable when you exchange contracts and not when you actually complete the purchase. Therefore this may be another expense which is payable upfront, but if taxes rise in the future you will not have to pay the higher rate. But If you don’t want to pay any tax until the end of the deal an Option Agreement may be more suitable as SDLT is only paid when you complete.

Some also suggest that a Delayed Exchange and Completion is less risky as they believe if it were set aside or terminated that any deposits would usually be returned as there are statutory provisions which may assist in reclaiming. However, whilst this may be true to a certain extent legally recovering sums paid to a Seller under either an Option or a Delayed Exchange and Completion could be equally as complicated from a practical perspective. In either case, deposits and fees are usually released to a Seller and not kept by his solicitor, which means that the Seller under each method may have spent this sum and recovery could be difficult. Whichever method is chosen we therefore always advise clients to avoid paying large amounts upfront.
If you are Selling a property to someone who actually wants to live in the property after they have exchanged contracts but before they purchase (often called a Tenant Buyer) there is also a difference to how they can occupy between an Option and a Delayed Exchange and Completion. With Delayed Exchange and Completion you can build in a licence to occupy on terms such as the Buyer paying the outgoings (which can include mortgage payments). Often Buyers are more comfortable with this as they understand what payments are being made and what for. However, this needs to very carefully drafted by a solicitor so it does not amount to a tenancy as if things went wrong and the Buyer had to leave then under a licence he would be obliged to leave as soon as you requested this whereas if he were classed as Tenant he would have rights to be given the appropriate notices.

With the Option method however, the occupier must be treated as a Tenant and you must use an Assured Shorthold Tenancy. In addition to appropriate notice periods a tenant also has rights to apply for registration of a fair rent and therefore the rent you agreed can be reduced after entering into the transaction which obviously means reducing the income expected which could cause difficulties for you. This is something you need to bear in mind.

You also need to remember that a number of residential solicitors are still unfamiliar with Options and Delayed Exchange and Completion despite their popularity. It is therefore essential to use solicitors with the necessary experience so they you can advise you correctly, as although both methods are used widely in commercial property some residential solicitors still don’t understand how they work.

Making Your Decision

So when making your decision between the two options you need to think about what you want from the deal, whether you want flexibility or commitment, whether you actually want a completion or not and are you happy to pay tax upfront rather than at the end and does your budget allow for this.

About MS Law LLP

At MS Law LLP we specialise in providing high quality legal services relating specifically to property transactions ranging from lease options and delayed exchange and completion to title splitting, acquisition, disposal, development and letting of commercial property, through to residential property and other creative solutions. We can therefore use our extensive knowledge and experience in bringing your transaction to fruition and can be contacted on 0161 772 4500 or info@ms-law.co.uk.

Comparison of Options and Delayed Exchange and Completion

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