A number of organisations are willing to buy properties from home owners on terms requiring them to grant a lease back to the former owners, to enable them to release the equity in their properties without having to move. The issue in Delaney v Can Chen [2020] EWHC 6 (Ch); [2009] PLSCS 18 was whether, and to what extent, such a transaction may be vulnerable to attack as a transaction at an undervalue.
A person transfers a property at an undervalue if the value of the consideration, in money or money’s worth, received from the transferee is significantly less than the value, in money or money’s worth, of the property transferred by the transferor. If a person enters into a transaction at an undervalue to put assets beyond the reach of creditors, the court can make an order requiring the parties to “undo” the transaction: section 423 Insolvency Act 1986.
In Delaney, the buyer granted the home owner a tenancy of his property in May 2008. The evidence indicated that the property was worth £275,000, but the home owner sold the property to the buyer for £210,000. His creditors challenged the sale on the ground that it was a transaction at an undervalue.
The judge ruled that a transaction that depletes the transferor’s assets will not necessarily constitute a transfer at an undervalue. The buyer had not acquired the unencumbered freehold, but had acquired the freehold subject to the tenancy in favour of the home owner.
The lease formed part of the consideration for the purposes of section 423. There was nothing precarious about the tenancy and it had the potential to last for at least 21 years. It had a premium value, even though the tenancy was expressed to be personal to the home owner and was, therefore, unassignable. Its surrender value was measurable in money’s worth, and there was no basis for concluding that it had no value at all. It was for the creditors to show that the transaction was at an undervalue, that is, the tenancy had a premium value of less than £65,000. They had not produced such evidence and, consequently, their action failed.
Interestingly, the judge ruled that the outcome would not have been different had the transaction followed a more conventional course and the transfer and lease back had both been executed simultaneously. This was because the transfer and tenancy were indissolubly bound up as part of the same overall transaction.
Following concern that some unscrupulous companies may take advantage of struggling home owners, Shelter has advised that home owners obtain independent valuations from established estate agencies before entering into sale-and-lease-back schemes. This decision indicates that sale-and-lease-back companies would be well advised to obtain independent valuations for their own protection too.
Allyson Colby is a property law consultant
