Solving the problem of fractional lease investment schemes

A hearing took place at the High Court of Justice on Wednesday 18 September, at which the path was cleared for asset recoveries in a Ponzi-style care home investment scheme.

Background
The Qualia Group operated care homes across the North of England. It acquired the homes by taking in excess of £53 million from small investors, offering them leases to 793 rooms across 16 care homes in return. The leases promised a return of 8 to10% per annum.
However, the Financial Conduct Authority raised concerns over the legality and sustainability of the investment model, leading to a court case against the Qualia director, Robin Forster. In July 2023, the High Court held that the investment scheme constituted an unauthorised collective investment scheme and that the anticipated profits from the care homes implied by Mr Forster were inaccurate and unreliable. It held that Mr Forster had made false and misleading statements to investors regarding the scheme’s sustainability, causing significant financial harm to those hundreds of investors.

The Qualia companies became insolvent and the care homes were unsaleable because of the existence of the leases. This is a common problem with what is known as ‘fractional ownership’ or ‘room investment’ schemes.

The Application
Stephen Hunt of Griffins, a licensed insolvency practitioner and the appointed administrator of the Qualia Group, and his solicitors, Gateley Legal, made a successful application to the Court in relation to one of the homes, St Mary’s in Manchester, for orders under the Financial Services and Markets Act 2000 (FSMA). The application was made with the full support of the overwhelming majority of the investors in St Mary’s, who recognised that if the property could be sold the care home could continue operating and they would receive some of their investment back. If the property could not be sold, the care home would have been closed and abandoned. The Court agreed that the few investors not in a position to surrender their leases voluntarily could be required to do so.

As well as safeguarding a care home recently rated ‘good’ by the Care Quality Commission and its 77 residents, it can now be sold to new owners able to invest in its future. The investors who thought they had lost their money could soon recover up to a third of their investment.

Consequences for the Qualia Group
As well as safeguarding the 77 residents and 85 staff at St Mary’s, it is expected that by the end of this year a similar process will safeguard over 600 jobs and protect 450 vulnerable and elderly residents living in the remaining Qualia care homes.

It is also hoped that the hundreds of investors in the Qualia scheme who mistakenly invested in an unlawful investment scheme and thought they had lost their money, will now receive a substantial return.

The rescue of St Mary’s was only possible because of the support of HMRC and Manchester City Council for what had been a loss-making business. The business has now begun generating profits and this will provide a further return to creditors and investors whilst preserving a valuable community resource.

Wider Consequences
Whilst specific to its facts, the ruling offers a potential framework for managing the assets and liabilities tied to these unlawful ‘fractional ownership’ or ‘room investment’ schemes, in which small investors have lost hundreds of millions of pounds around the country. There are many similar schemes that have been paralysed by the inability to sell the properties due to the existence of leases that cannot be recovered or returned for different reasons, even though most of the investors want the properties to be sold.

Comment
Stephen Hunt said; “It is rare for an insolvency practitioner to obtain a happy outcome for all concerned. This case marks the culmination of two years of hard work by a number of professionals and stakeholders to obtain a remarkable outcome for investors, staff, and vulnerable residents.

“I was appointed to a loss-making care home group formed by a Ponzi scheme, soon after the end of COVID and during the energy crisis caused by the Ukraine war. Qualia had no access to funding as it had no free assets to borrow against. From this unpromising start we have turned round the business and implemented a novel legal solution to unlock returns to investors and creditors of up to £20 million. Everyone involved should be very proud of that.”
Griffins worked closely with Gateley Legal to develop and implement this novel legal solution. Matthew Brown, lead partner at Gateley Legal, said: “We were determined to find a solution to this difficult problem. After two years of hard work, we are proud to have found a way to help the care home residents, employees and investors. We are especially pleased that this novel solution might have wider benefits for small investors in similar schemes around the country.”

The Court hearing was led by barristers Eleanor Temple KC (Kings Chambers) and FSMA specialist Ruth Bala (4 Pump Court).

​

For further details please contact Donna Brown or Louisa Lane.