SWEAT EQUITY/HOMESTEADING EXAMPLE HEADS OF TERMS

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1 SWEAT EQUITY/HOMESTEADING EXAMPLE HEADS OF TERMS HOMES AGAIN PROJECT EXAMPLE HEADS OF TERMS This guidance is based on a Full Repairing and Insurance (FRI) Lease used by an Estate Agent and Property Agent active across Great Britain. This document and the examples includes are for illustrative purposes only. FRI leases are often used for commercial premises, but are suitable for residential agreements. English and Scottish law differ for FRI leases, in that in Scotland the term in which a Landlord should act reasonably is not automatic and in order to secure this clause, it must be written into the lease. Another difference is that there is no automatic entitlement to an extension to the lease when it reaches its finish date. You are advised to seek independent legal advice before entering into an agreement. Duration of a lease There is no set limit for a Sweat Equity agreement. In practice these tend to be longer than standard leases to represent the financial and physical commitment a Tenant would be making to the property. The length of lease needs to be long enough that the Tenant feels they are being reimbursed for their investment through the reduced rent over time. The lease length should also allow for the amount of work required to the property before it comes habitable. Below is a worked example, taking into account actual costs, allowing for a financial cost to be put on the Tenants labour and the cost of securing accommodation whilst the works are being carried out. Costs to tenant Cost of refurbishment of property, including plans/professional fees/materials 30,000 Value of tenants labour, based on 20 hours per week, over 2 year period, at value of 15 ph 31,200 Time taken to bring property up to habitable condition, during which tenant would need to live elsewhere (Based on potential rental income of target property of 575 pcm) 13,800 Total "Cost" to tenant to bring property back into use. 75,000 Consideration for owner Length of time the property would need to be let for in order for the owner to recover the cost of refurbishing the properties themselves. 10 yrs, 9 months.

2 Whilst there is no set time period for the lease agreement, it would be reasonable for a tenant to expect to benefit from the property for longer than their financial and physical contribution would cover. Anecdotally, owners have offered tenants the right to twice the length of occupancy in relation to potential rental income for the owner. In the case of the example, a 22 year lease would be agreed. Break Clause The Tenant would have an option to terminate the lease giving the Landlord not less than 6 months notice. Refurbishment and Reconstruction Costs A schedule of plans and costs will require to be agreed between the Landlord and Tenant prior to works commencing. The timescales of the project, including key milestones will need to be agreed between the parties. There should be flexibility within the lease to allow for an extension of time in the event of a delay in completing the works caused by circumstances outside the fault or control of the Tenant. Reimbursement of Restoration Costs You should agree a formula of reimbursement to the Tenant during a period of the lease, should the lease be terminated. However deductions could be made to the repayment. 1. Refurbishment costs could be reduced by a percentage which would represent the fact that the Tenant has benefited from residing in the property. 2. In addition to the percentage deducted at point one, a sum to be calculated by multiplying the number of months that the lease has run as at the date of termination, by a figure representing 1/120 th (being one month) of the remaining reimbursement due, would be deducted for each month the tenant has occupied the property. 3. A repayment schedule for the owner could be in equal quarterly payments over a 2 year period from the date the Tenant terminated the lease. 4. After a 10 year period the restoration costs will be deemed to have been written off and no reimbursement would be due to the Tenant. The following example is based on the example overleaf. Cost of refurbishment Tenants labour contribution Cost subject to reimbursement calculation Percentage by which the refurbishment costs would be deducted due to the tenant terminating the lease For the benefit of this example, the deduction 30,000 31,200 61,200 being 20% 12,240 48,960/120= Deduction of the number of months the tenant has 408 per month occupied the property. For the benefit of this x 24 months= example, an occupancy of 24 months 9792 Remaining cost of refurbishment to be repaid to tenant. 39,168

3 Insurance The Tenant would be liable to insure the property for the reasonable full reinstatement of the property during the length of the lease. Use the lease should specify any restrictions on the occupancy of the home. For Example For the purpose of a private domestic accommodation only. Home working providing activity only carried out by the Tenant, and no employees. Maintenance The Tenant should at their own cost and expense maintain the home, any outbuildings and gardens associated with the tenancy. For Example The property is to be kept in a wind and watertight condition throughout the duration of the lease. The Tenant would maintain the interior of the home and buildings in a neat, tidy and clean condition and will be responsible for any internal repairs and decoration. The Tenant would keep the whole property; including gardens and any amenity ground in a neat and tidy condition and in particular take reasonable steps to protect plants, shrubs and trees whether growing at the date of entry or planted thereafter. Alterations the Tenant shall not undertake any alterations without the prior written consent of the owner, except those done in accordance with the plan of specifications agreed prior to entering the lease. Assignations and sub-letting the Tenant shall not be entitled to assign or sub-let their interest in the property without prior written consent of the Landlord. Outgoings the Tenant shall pay and discharge all outgoings levied for services on the property including council tax, electricity, gas, telephone and water when they fall to be paid. Expenses Each party shall pay their own legal fees and expenses with regard to the lease. Irritancy If the rent or any part thereof remains unpaid for two months after the due date or if there has been any breach by the Tenant of ay of their obligations within the lease or if the Tenant or any guarantors go into liquidation or become bankrupt or insolvent or sign a Trust Deed for creditors, the Tenant shall at the sole option of the Landlord forfeit all rights and title under the lease and will give up possession of the subjects. You are advised to check the Sample Minute of Agreement contained within the pack which gives examples of Terms and Conditions you may include in a lease. Sample letters of agreement are also included in the pack for illustrative purposes.

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5 SWEAT EQUITY/HOMESTEADING EXAMPLE MINUTE OF AGREEMENT HOMES AGAIN PROJECT The sample document below is based on a Minute of Agreement between a landowner in the Scottish Borders and a tenant taking a 20 year Repairing and Maintaining lease in This document and the examples included are for illustrative purposes only. You are advised to seek independent legal advice before entering into an agreement. MINUTE OF AGREEMENT BETWEEN OWNER OF PROEPRTY AND REGISTERED ADDRESS AND NAME(S) OF TENANT AND ADDRESS The parties hereto HAVE AGREED and DO HEREBY AGREE as follows:- First {tenants name} shall restore to a habitable state the property known as {property address} which together with the ground pertaining as edged red on the plan annexed and signed as relative hereto is hereinafter referred to as the subjects, within a period of {to be agreed between owner and tenant} from the date of approval of any building warrants/planning permissions/improvement grants applied for the subjects, and that according to plans approved by {the owner} and other such departments as may be required by law to approve the said plans, and shall, without prejudice to the generality of the foregoing providing water, electricity and sewage to the subjects, and shall obtain a Certificate of Completion in respect of the execution of the said works. During the said period {as above} as may be required for the said restoration of {tenant s name} shall be permitted to occupy the subjects only for the purpose of carrying out the said restoration. Second {tenants name} shall ensure that he said works re carried out in a proper workmanlike manner, and if {the owner} is of the reasonable opinion that are not ensuring that the said restoration is being carried out in a proper workman-like manner in accordance with the duly approved plans aforementioned. {The owner} shall be entitled to terminate the agreement, on a giving {the tenant} not less than six months notice of its intention to do so. In the event of {the owner} terminating the Minute of Agreement in terms of this clause, or in the event of {the tenant} giving up work on the subjects prior to their completion in terms of Clause (First) hereof. {The owner} shall not be bound to make any payment of any kind to {the tenant} and it is hereby agreed for the avoidance of doubt, that {the tenant} shall be deemed to have given up work on the subjects if they have without good reason, made no significant progress in the restoration of the subjects over a period of six months.

6 Third {the tenant} shall be bound to make the fullest enquiries and use all reasonable efforts to obtain Local Authority and other grants towards the restoration of the subjects to a habitable state, and if the said Local Authority of other Authority offers a Grant but subject to any conditions. {the tenant} shall make all reasonable efforts to comply with the said conditions and obtain including grants. In the event that {the tenants} are unable to obtain such grants they shall be entitled to???from this agreement without penalty. {the owner} will take no action which might hinder of restrict any application for grant made by {the tenant} and will co-operate with them in producing evidence of ownership to the relevant Local Authority or other Authority. FOURTH {the tenant} shall pay to {the owner} throughout the duration of this Agreement the sums of money which {the owner} may expend in effecting and maintaining insurance of the subjects against damage and destruction from such risks as {the owner} shall determine to the full reinstatement value thereof. The sums insured in respect of the subjects shall be agreed each year between {the owner} and {the tenant}. In the event of damage or destruction of the subjects by any insured risk {the owner} shall expend all sums recovered under their insurance policy in the repair and reinstatement of the subjects. For the avoidance of doubt {the owner} shall be under no obligation to expend sums beyond those recovered under the insurance in the repair and reinstatement of the subjects. FIFTH {the tenant} shall carry out the restoration of the subjects in such manner as shall cause the least disturbance to neighbouring properties, and tenants, and in the event of such neighbouring properties or tenants sustaining any damage through their operations. {the tenant} shall be solely liable to make reparation thereof. SIXTH In recognition of the work which {the tenant} intend to carry out on the subjects, {the owner} hereby grants {the tenant} permission to occupy the subject and that on the following terms and conditions:- (a) The permission shall begin on the issue of a Certificate of Completion by the Local Authority in respect of the subjects or the date that the Local Authority certifies that the subjects are fit for habitation or {date} whichever of those three dates is the earliest (the date of entry) and shall continue for {No. of years?} from that date or terminated as hereinafter provided, whichever shall be soonest. {the tenant} shall not be entitled to assign this permission or part with or share occupation of the subjects with any other parties without the prior written consent of {the owner}. (b) Upon the issue of the aforesaid Certificate of Completion of the subjects {the tenant} will accept {nominal amount agreed as rent, i.e. 1} from {the owner} in full and final settlement for the improvement works undertaken to the subjects by {the tenant}. For the avoidance of doubt, no compensation of any kind shall be payable to {the tenant} in the event of their giving up work on the subjects prior to the issue of the said Certificate of Completion. (c) No rent or other consideration shall be payable by {the owner} in respect of this permission. {the tenant} will however be solely responsible or payment of any community charges, rates or other Local Authority impositions in respect of the subjects, or their occupation thereof. (d) {the tenant} will be responsible for all electricity, gas, water, and telephone charges incurred during the period of their occupation and undertake to have the meters read and accounts paid promptly. (e) {the tenants} will maintain the subjects throughout the period of their occupation in similar order to that which they will in at the commencement after the Certificated completion of the restoration works aforesaid. {the tenants} will use the subjects solely as a private dwelling house for occupation by themselves and from time to time members of their family and other private visitors.

7 (f) {the tenants} will not make any structural or other alterations to the subjects without {the owners} prior written consent. (g) {the tenant} will no do anything which might impair the efficient functioning of the water and drainage systems of the subjects. If the subjects are served by a septic tank {the tenant} undertake to have this emptied at the end of each year of their occupation, in the even of it so long continuing. (h) {the tenant} will not at any time permit the subjects the possession or use of any substances prohibited by the Misuse of Drugs Act 1971 or any Others to Regulations made hereunder and will take every precaution to ensure that no-one invited to visit the subjects brings or uses any such drugs. {the tenant} will be the occupier of the subjects for the purposes of the said act. (i) {the tenant} will not keep or allow to be kept any animals or other pets in or on the subjects expect with {the owners} prior written consent. (j) {the tenant} will not allow any unnecessary noise to be made in or on the subjects or allow any other cause of annoyance or disturbance to {the owner} or neighbouring properties or occupiers and they will not use the subjects for any immoral or illegal purposes. (k) {the tenant} will be permitted to walk on {the owners land where applicable} but will observe the Country Code and any directions given to them by or on behalf of [the owner} (l) {the tenant} will maintain any garden ground of the subjects in a neat and tidy condition throughout the period of their occupation of the subjects keeping the grass cut and weeds under control and will not cut down, limb or remove any trees on the subjects without the prior approval of {the owner} (m) {the tenant} will be responsible for any structural maintenance or repair of the subjects during their occupation of them and they will also be responsible for any maintenance or repair of fixtures and fittings contained within or on the subjects. They will not be responsible for damage caused to the subjects by structural movement, except insofar as such movement has been occasioned by their own works to the subjects or by any fault or negligence on their part. For the avoidance of doubt, it is declared that {the owner} shall only be responsible for making good damage to the subjects caused by naturally occurring structural movement up to the amount recoverable under the insurance policy to be effected by [the owner} in terms of clause (fourth) hereof. (n) {the tenant} will be responsible for the suitable and proper insurance of any of their belongings within or on the subjects and will have no claim against {the owner} for any loss thereof by accident, theft, burglary, storm or fire. (o) Access issues is appropriate Vehicular and pedestrian access to the property will be given {if appropriate colour access track on location plan} {the owner} will before {date} fill in all potholes on the section of the track marked on the plan and provide hardcore track access to the subjects. (p) In the event of any breach, non-observance or non-performance of any of the conditions of this permission to occupy. {the owner} will be entitled to give {the tenant} notice in writing to terminate their occupation on the expiry of the period of four weeks from the date of this notice and to resume possession of the subjects and that without prejudice to {the owner} right to recover any damages for any antecedent breach of these conditions. (q) At termination of the permission to occupy {the tenant} will remove from and vacate the subjects without any legal warnings or process of law and will leave the subjects in at least as good condition as they were in at the date of Certificated Completion of the works. (r) Any notices given by or on behalf of {the owner} in terms of this occupation shall be deemed to be sufficiently given if sent to {the tenant} at the subjects by recorded delivery post. ELEVENTH Any questions, disputes or difference arising between the parties hereto shall be referred to the decision of a single arbiter mutually chosen or nominated, failing agreement by the President for the time being of the Royal Institute of Chartered Surveyors (Scottish Branch) whose decision shall be final and binding on both parties.

8 TWELTH Where the consent of {the owner} is required in terms of this agreement, it will not be unreasonably withheld or delayed. THIRTEENTH The parties hereto consent to registration hereof for preservation and execution. IN WITNESS WHEREOF these presents consisting of this and the four preceding pages are with the plan annexed signed by the parties hereto all together at.. Signatures to be witnessed. You are advised to check the Sample Draft Heads of Terms contained within the pack which gives more information on the terms of a Full Repairing & Insurance Lease. Sample letters of agreement are also included in the pack for illustrative purposes.

9 SWEAT EQUITY/HOMESTEADING EXAMPLE LETTER TO AGREE NOMINAL RENT HOMES AGAIN PROJECT Dear Property address In terms of the Minute of Agreement between us {property address} and {dated} relative to the restoration of {property address} aforesaid, we hereby acknowledge to have received from you the cheque in the sum of {nominal sum} which we hereby accept in full and final satisfaction of all compensation due to us for the restoration and improvement works undertaken by us to the subjects know as {property address} aforesaid. For the avoidance of doubt, we acknowledge that the rent free occupation of the said subjects permitted to us in terms of the said Minute of Agreement shall be for {No of years,} from {date of agreement}, notwithstanding that the completion certificate in respect of our works of restoration and improvement was issued on {date} Yours sincerely

10 SWEAT EQUITY/HOMESTEADING EXAMPLE LETTER REGARDING POSSIBLE RENT AT END OF LEASE HOMES AGAIN PROJECT Dear Property address I hereby confirm that on the termination of the Minute of Agreement between us relative to {property address} and {dated} providing that the house is not then required for occupation by a member of the owner s family and is not to be sold, you will be given the first option to take a tenancy of it at the open market rental for such a period and on such other terms and conditions as may be mutually agreed. Yours sincerely

11 SWEAT EQUITY/HOMESTEADING EXAMPLE LETTER REGARDING POSSIBLE SALE AT END OF LEASE HOMES AGAIN PROJECT Dear Property address I am writing as requested to confirm that in the event of our requiring to sell {property address} on the open market at the termination of the Minute of Agreement between us we will let you have advance notification of the sale, and of any closing date which may be fixed and we will generally give you every opportunity to offer to purchase it should you so require. Yours sincerely