This post focuses primarily on rent-to-buy house deals, but it also applies to some other complex or high-risk consumer contracts.
I’ve explained how some rent-to-buy deals work, and what the risks are for buyers and some sellers. So, aren’t these problems with rent-to-buy houses the buyer’s fault if they don’t get legal advice? ( I use the terms “buyer” and “seller” to also refer to parties in an ‘option to purchase’ contract).
Obtaining advice may be discouraged
I’m not aware of any buyers being prevented from obtaining legal advice, but selling techniques which employ trust and reciprocity and suggest scarcity and urgency may reduce the likelihood that the buyer will seek independent legal advice. I hope to write more about these selling techniques in a later post.
Buyers may not be able to afford legal advice.
Sellers or intermediaries are aware of the buyer’s financial circumstances, and will know whether the buyer can afford to obtain legal advice once any deposit or option fee is paid. In fact the seller or intermediary may base the fee on the total funds the buyer can obtain.
For example, on page 131 of “How to Buy a House for $1”, Rick Otton gives an example of a hypothetical conversation with a buyer, which includes this:
You: “How much up-front money would you have to get started?”
Them: “Around $5,000” (Click)
You: “Up to…?” (Pause)
Them: “$8,000” (Click)
You: “But no more thaaaaan…?”
Them: “Actually, we’ve got $8,200”. (Click)
Assuming the buyer must then find money for moving and other costs, it’s difficult to see how this buyer could afford to pay for independent legal advice.
“But they were given the choice”
Certainly some buyers sign a statement to say that the seller recommended that they seek legal advice but have chosen not to take that advice. In fact a statement recommending legal advice is part of documentation required under national credit laws.
However, it should be no surprise that buyers sign documentation which includes such a declaration, even if they were actually discouraged from seeking legal advice. Generally a signed statement such as this may not be accepted as evidence that the buyer was encouraged to get legal advice, for example if a court, tribunal or ombudsman is deciding whether the seller’s or intermediary’s conduct was unjust under national credit laws
Going to a lawyer suggested by the seller or intermediary.
Over ten years ago, I attended a meeting between staff from Consumer Affairs Victoria and some individuals from the vendor finance and rent-to-buy industry. I recall some industry participants discussing how many lawyers didn’t understand these contracts, and that they need to ‘educate’ lawyers so they can refer buyers to them for legal advice.
Lawyers must comply with strict code of ethics, which includes that they must act solely in the interests of their client. I am not suggesting that any particular lawyers are breaching those ethics. However, my experience at consumer legal services suggests that, in general, consumers who accept a referral to a lawyer from another party to the transaction can receive advice that is inferior to advice they could receive if they chose their own lawyer who doesn’t know the other party.
In some cases I’ve seen, a number of borrowers who had mortgaged their home for risky high cost, short-term, interest only loans received independent legal advice from lawyers who had their offices in the same building as the lender, or who received regular referrals from the lender. Our lawyers’ assessment was that the legal advice was often minimal, and excluded warnings that you might have expected from more thorough advice.
A stark example of lawyers “dropping the ball”, possibly as a result of a networking relationship with a referrer, is when law firm Diakou Faigan did the legal work for most of the 120 retirees who entered a scheme with Money for Living. The retirees subsequently lost their homes through the “Money for Living” scheme, and sued the law firm for failing to advise them of the risks. Money for Living had referred retirees to Daikou Faigan which was in the same office block and also acted for Money for Living’s financiers.
It appears to still be the case that some rent-to-buy promoters claim that they take care to ensure that the lawyers to whom they refer buyers, and sellers, are au fait with rent-to-buy agreements. However, this gives the promoter the ability to refer only to lawyers who they know and who they believe are generally supportive of the strategies.
On one hand, it could be argued that many lawyers don’t understand these strategies and it is best for all parties to have a lawyer or accountant who does. On the other hand, it is open to ask whether buyers (and some sellers ) are really getting the legal advice they need – particularly if the intermediary is in the room while the advice is provided, as suggested by one Otton student. I have seen advice provided about rent-to-buy by some private practitioners who don’t receive referrals from those in the business, and those lawyers have been “spot on” in outlining the problems and risks. So, the question remains whether those in the business are looking for lawyers who understand these deals, or just for lawyers who are likely to support them and their business. It might be convenient for operators to think that the deals are so great that a lawyer who is negative about these deals doesn’t understand them. Whether operators believe this or not, it is somewhat self-serving.
On one of his podcasts, Otton says “all the lawyers that do all these strategies around Australia all go to the three day event. People get very well connected….”
Otton also suggests that lawyers who say that these deals are “illegal” say this out of ignorance, because they are unwilling to admit they don’t understand them. Of course this is a very convenient message. According to Otton, lawyers who say these deals are illegal or warn potential buyers against them just “don’t understand” and say they’re illegal so they can charge for poor advice. Read more about this podcast.
This cosy relationship with lawyers is not in the best interests of buyers, sellers or perhaps even Otton students. I don’t know whether the Susilos or Ms. Lines sought advice from a solicitor who was ‘outside the tent’ before they got into strife with the regulator, but I suspect if they did they may have avoided the problems they subsequently faced.
This is not to say that solicitors who attend Otton’s seminars are acting unethically. However, lawyers who take a more conservative approach, who understand these transactions but focus more on the risks, are unlikely to be asked to provide advice.
The following transcripts are from past Rick Otton students who were on a panel at one of Otton’s seminars. Highlighting is mine. These suggest that some effort may go into identifying solicitors to act for one of the parties – not only those lawyers who understand rent-to-buy contracts, but those who have a positive opinion about them. There is some discussion about lawyers or accountants “killing” a deal, and the need to be present when the other party gets legal or financial advice so you “keep control”.
“ if you can control who [buyers] can go to ……… you can control the outcome.”
Selected transcripts from Otton’s Youtube channel – all from Otton seminars where past students speak on a panel about their experiences and advice.
Panel member: “The biggest mistake I made was probably on the second deal – it seemed great – but it’s lawyers and accountants unfortunately that kill deals if you’re not with the seller in front of their lawyer or accountant. That’s the only way you can stay in control of the process if you give them the paperwork and send them off, you’ve lost control of it. You don’t know the conversation that’s gone on between them you need to set it up in away, that even if there’s an agent, or an accountant, whatever it is, they all need to be in the room so the negotiation can move forward. And you get agreements from every party otherwise you’ve got to backup and start again. And recently I had another deal go wrong just like that, we’ve got the real estate agent, the seller, everyone was moving forward and they said we need to take this to our accountant – they came back with a ‘no.’”
Audience Question: How often would you find a solicitor or accountant would kill a deal and what do you do to counter that?
1st panel member: “If you use the professional solicitors that understand what vendor finance is you’ll be pretty safe.”
Otton: “A lot of solicitors specialise, – you’ve got solicitors who specialise in divorce law, commercial law, different types, so you’ve just have to find the area of law really, and people get to know”
Second panel member: “I think you taught us early on Rick, to interview solicitors and to sort out those who know what’s what and what’s not and I think Tony summed it up this morning when he said ‘Four solicitors all have a different opinion’ and you just have to sort out those who do have the opinion that you require. But do it more than once because you’re going to have people out there who – sellers who have no idea, but you can refer them to someone who does.
Third panel member: Well, in South Australia it’s a bit different. Regulations around vendor financing. So I did find I had to go into the city and I did talk to a couple of lawyers and they were recommendations by Tony so when I have a seller who needs to talk to someone you can give them a couple of recommendations and hopefully they’ll take one of them – so you’re kind of directing them, you don’t have to say ‘well talk to this guy’, because he’ll think, ‘ah, he might be in the guys pocket, paying him’, so if you can give a couple of recommendations or go and see the local guys and see what they know – don’t tell them what you’re doing, just see what they know and then you’ll know whether you can use them and then you can build a relationship with them so you’ve got a bit of a data base before you get a buyer, because if you can control who they can go to –even by a list of 3 or 4 you can control the outcome.