How to be protected against home "buy back" schemes

Introduction

New laws in force from 14 October 2003 protect homeowners against home "buy-back" schemes. These schemes, apparently most common in South Auckland, have seen many consumers lose their homes to unscrupulous finance companies.

The new laws are designed to stamp out these schemes by imposing heavy restrictions that will be disincentives for those promoting the schemes. The new laws also provide remedies for people who have already entered into buy-back schemes.

Homeowners should avoid any buy-back scheme. Anyone who has entered into such a scheme should see a lawyer without delay.

What is a buy-back scheme?

Usually these schemes have involved homeowners who are in debt being persuaded to sign over ownership of their home to a company fronted by a promoter, as a means of raising money. The former homeowner then pays rent to the company so that they can continue living in the house. They are told that they can buy the house back in two or three years.

As the company is now the legal owner of the house, it can then raise money through a mortgage against it. The houses are frequently lost in mortgagee sales. In almost all cases the consumer ends up losing both their home and the equity they’d built up in it.

The CREDIT CONTRACTS AND CONSUMER FINANCE ACT 2003 now protects against these schemes, which it calls "buy back transactions". The Act defines a buy-back transaction as one where:

• a person (the "occupier'") transfers, or agrees to transfer, ownership or some other legal interest in their land to another person (the "transferee''), and
• the land is the occupier’s main home when they enter into the transaction, and
• after the transfer, the occupier (or someone that the occupier chooses) has a right to live on the land, and
• the occupier (or someone that the occupier chooses) has a right to buy back the legal interest in the land, in whole or in part, or the occupier has an understanding with the transferee or with the scheme’s promoter that this right exists, and
• the occupier is an individual who enters into the transaction mainly for personal, domestic, household or investment purposes

A contract or arrangement that is "in substance or effect" a buy-back transaction will be treated as one for the purposes of the Act, even if it doesn’t strictly meet the definition above.

Protections for homeowners entering into buy-back schemes

The CREDIT CONTRACTS AND CONSUMER FINANCE ACT 2003 provides protections to ensure that anyone considering entering into a buy-back scheme understands exactly what is involved:

• Initial disclosure – The transferee must give you, in writing, key details about the arrangement you’re entering into before you enter into it. This information must be presented clearly and in a way that’s likely to bring it to your attention. The information required is listed in Schedule 3 of the CREDIT CONTRACTS AND CONSUMER FINANCE ACT 2003.
• Independent legal advice – The transferee must make sure that, before you enter into the transaction, you received legal advice from an independent lawyer. The lawyer must witness your signature and certify that he or she explained the agreement to you.

If you were introduced to the transferee by a promoter of the scheme, and the transferee is someone who is not usually involved in making loans or in buy-back schemes, the requirements for initial disclosure and independent legal advice are imposed on the promoter, instead of the transferee.

What happens if the requirements for initial disclosure or legal advice aren’t met?

If those requirements aren’t met, the following safeguards apply:

• The transferee can’t transfer ownership of your home to anyone else without getting permission from a court. The court will allow the transferee to do this only if your interests haven’t been harmed.
• You can take the promoter or the transferee (as applicable) to court for "statutory damages". You can recover $3,000, or 5 percent of the rateable value of the land, whichever is less.

The transferee or promoter (as applicable) can also be fined up to $30,000 if the initial disclosure and legal advice requirements aren’t met.

A transferee who transfers ownership of your home without a court’s permission can also be jailed for up to one year or fined up to $200,000 or both.

Disclosure requirements after you’ve already entered into the arrangement

If you entered into the buy-back scheme before 14 October 2003, you won’t be protected by the requirements for initial disclosure and legal advice explained above. But the transferee also has some ongoing obligations to disclose information to you while the arrangement continues. Therefore you will be able to recover statutory damages against the transferee if, after 14 October 2003, the transferee fails to comply with those ongoing requirements, as follows:

• Variation disclosure – If you agree to change any of the terms of the arrangement, the transferee must give you the details of the change in writing, before the change takes effect (but not if the changes are in your favour).
• Request disclosure – At any time you can request the transferee to provide you with certain information about the transaction, in writing (unless you’ve already requested the same information within the last three months). The information you can ask for is:

• the amount, timing, and number of the payments that you must make under the transaction
• full details of any changes made to the transaction since it was made
• a copy of any disclosure statement that was provided, or that should have been provided, before the date on which you made this request

The transferee can also be fined up to $30,000 if these other disclosure requirements aren’t met.

Occupier has "caveatable" interest in the home

If you’ve signed over ownership of your house under a buy-back scheme, you can lodge a caveat with the local office of the Land Titles Service to prevent your home being sold or dealt with in any way. In order to be able to sell or otherwise dispose of your house, the transferee will have to get a court order for the caveat to be removed.

Unreasonable buy-back fees or default fees

Fees that you are required to pay under the buy-back arrangement must be reasonable. The same applies to any "default fee" that you are liable to pay for breaching the arrangement or as a result of the other side enforcing the arrangement. If the fee is unreasonable, you can apply to the court for the fee to be cancelled or reduced (or to the Disputes Tribunal if the money involved is not more than $7,500).

What options do I have if I’ve already entered into a buy-back scheme?

If you had already entered into a buy-back transaction when the new laws came into force on 14 October 2003, you may be able to get a remedy from a court (or a Disputes Tribunal if the amount you’re claiming is not more than $7,500). The court can "reopen" the buy-back transaction if:

• the transaction is oppressive, or
• the transferee has exercised, or intends to exercise, a power under the transaction in an oppressive way, or
• you were induced to enter into the transaction by oppressive means

"Oppressive" means oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice.

The court will take all the circumstances into account, and in particular will consider the following things (if applicable):

• whether the amount you have to pay under the transaction is oppressive
• if you’re in default under the transaction, whether the time given you to remedy the matter is oppressive
• if the transferee has refused to release part of any security interest relating to the transaction, or has agreed to do it subject to conditions, whether the refusal or the conditions are oppressive

The court has wide powers if it decides to reopen the buy-back transaction, including:

• cancelling or amending it
• ordering the transferee to pay you a sum of money
• ordering the transferee to transfer ownership of the house back to you

Cautionary notes

• If you have entered into a buy-back scheme, your first step should be to see a lawyer. Your lawyer will advise you about what remedies are available to you and represent you when you pursue an appropriate remedy.