Solving fractional lease investment issues

A significant hearing took place at the High Court of Justice on 18 September, allowing for asset recoveries in a Ponzi-style care home investment scheme operated by the Qualia Group. This ruling marks a crucial step towards resolving the complexities associated with fractional lease investment schemes, which have left many small investors at a loss.

Background

The Qualia Group managed care homes across the North of England, raising over £53 million from small investors in exchange for leases to 793 rooms across 16 care homes. These leases promised annual returns of 8% to 10%. However, concerns from the Financial Conduct Authority (FCA) regarding the legality and sustainability of this investment model led to legal action against Qualia director Robin Forster. In July 2023, the High Court ruled that the investment scheme was an unauthorized collective investment scheme, and that Mr. Forster had made false and misleading statements to investors about the sustainability of the scheme, resulting in substantial financial harm.

After the ruling, the Qualia companies entered insolvency, and the care homes became unsellable due to the presence of existing leases. This situation is a common challenge faced by fractional ownership or room investment schemes, leaving investors with limited options.

The Application

Stephen Hunt, a licensed insolvency practitioner and the appointed administrator of the Qualia Group, along with his solicitors at Gateley Legal, made a successful application to the Court concerning one of the homes, St Mary’s in Manchester. This application was supported by the vast majority of investors in St Mary’s, who understood that selling the property could allow the care home to remain operational and provide a chance to recover some of their investments. If the property could not be sold, the care home would have been shut down, abandoning its 77 residents.

The Court ruled that a few investors unwilling to surrender their leases voluntarily could be required to do so, thereby facilitating the sale of the care home. This decision not only safeguarded the recently rated ‘good’ care home but also ensured its continued operation under new ownership, allowing for investment in its future. It is anticipated that investors could soon recover up to a third of their original investments.

Consequences for the Qualia Group

The outcome at St Mary’s has far-reaching implications. In addition to preserving jobs for 85 staff members and protecting the well-being of 77 residents, it is expected that a similar approach will be implemented to safeguard over 600 jobs and protect 450 vulnerable elderly residents across other Qualia care homes. Investors who believed they had lost their money may now receive a substantial return.

The successful rescue of St Mary’s was made possible through the collaborative support of HMRC and Manchester City Council, acknowledging the need for a sustainable business model. The care home has begun generating profits, which will provide additional returns to creditors and investors while preserving a vital community resource.

Wider Implications

While the case pertains specifically to the Qualia Group, the ruling offers a potential framework for addressing the asset and liability issues tied to unlawful fractional ownership or room investment schemes that have affected small investors nationwide. Many similar schemes remain stalled due to the challenges of selling properties encumbered by leases that cannot be recovered or returned, despite the overwhelming desire of investors to see the properties sold.

Comment

Stephen Hunt remarked, “It is rare for an insolvency practitioner to achieve a favorable outcome for all parties involved. This case represents the culmination of two years of dedicated effort from numerous professionals and stakeholders, resulting in a remarkable resolution for investors, staff, and vulnerable residents.”

Hunt was tasked with turning around a loss-making care home group that had been established as part of a Ponzi scheme, all while navigating the aftermath of COVID-19 and the energy crisis stemming from the Ukraine war. He noted the challenging conditions, stating that Qualia had no access to funding or free assets to leverage. However, through innovative legal solutions, the business has been revitalized, unlocking potential returns for investors and creditors of up to £20 million.

Matthew Brown, lead partner at Gateley Legal, emphasized the determination to find a solution for the complex issues surrounding these investment schemes. “After two years of hard work, we are proud to have developed a strategy that assists care home residents, employees, and investors, while also potentially benefiting small investors across similar schemes throughout the country.”

The Court hearing involved contributions from barristers Eleanor Temple KC (Kings Chambers) and FSMA specialist Ruth Bala (4 Pump Court), who played key roles in this significant legal resolution.