Out-Law News | 23 Oct 2014 | 4:51 pm | 3 min. read
Rosemary Scott, one of the former homeowners, brought a test case against a mortgage company that began possession proceedings after 'sale and rent back' firm North East Property Buyers (NEPB) went out of business. The UK Supreme Court has now ruled in favour of the mortgage firm, Southern Pacific Mortgages Ltd; finding that Scott only had a personal right to pursue Amee Wilkinson, the registered owner of the land, in relation to the promise that she could remain in the property and for potential fraud.
"Secured lenders will be reassured by this decision, which confirms the priority of their mortgages over other rights which may be granted by the purchaser of a property at the time of the purchase," said banking law expert Lucy Shurwood of Pinsent Masons, the law firm behind Out-Law.com.
"It is also worth noting that equity release schemes of the type described in this case were the subject of regulatory investigations by the FCA and are now a regulated activity, which should offer greater protection for homeowners such as the ones who brought this case after seeing their homes repossessed," she said.
In 2005, after getting into financial difficulties, Scott agreed to sell her home to an agent for NEPB at significant undervalue in exchange for the right to remain in her home indefinitely as a tenant at discounted rent and with the prospect of further payments after 10 years. Wilkinson, as the nominee purchaser for NEPB, obtained a buy-to-let interest only mortgage from Southern Pacific, which was unaware of the arrangement with Scott. It was a condition of the mortgage that only assured shorthold tenancies (ASTs) of no longer than one year could be granted, and that there were no existing tenancies.
Four days after the sale was completed, Scott was granted a two-year tenancy in breach of the terms of the mortgage. In 2009, she discovered that Wilkinson had defaulted on the mortgage and that a possession order had been made in favour of Southern Pacific. The court was asked to decide whether Scott had an equitable interest in the property dating from the point at which the contracts were exchanged, which amounted to an unregistered interest in land given priority over Southern Pacific's interest under the 2002 Land Registration Act. Upholding the decision of the lower courts, the Supreme Court said that she did not.
"The vendors acquired no more than personal rights against the purchasers when they agreed to sell their properties on the basis of the purchasers' promises that they would be entitled to remain in occupation," said Lord Collins in his leading judgment.
"Those rights would only become proprietary and capable of taking priority over a mortgage when they were fed by the purchasers' acquisition of the legal estate on completion, and then [previous case law] would apply, with the effect that the acquisition of the legal estate and the grant of the charge would be one indivisible transaction, and the vendors would not be able to assert against the lenders their interests arising only on completion," he said.
"The outcome is harsh on the people who lose their rights to occupy their former homes – a fundamental driver to them signing up to the equity release scheme - but the legal reasoning is sound," said property litigation expert Dev Desai of Pinsent Masons.
"A buyer can't grant an interest greater than it has - if I don't own a property, I can't lease it to someone. There's a necessary chronology of events: the buyer buys; at the same time the lender gets its mortgage because the mortgage and purchase were one event; only after the purchase and mortgage are complete can the buyer grant any proprietary right to someone else. Until the buyer had title, its obligation to grant a lease to the seller could only be a contractual obligation," he said. "A decision other than the one that the court reached would undermine the registration system and lead to unreasonable uncertainty to lenders and ultimately make life difficult for borrowers and purchasers."
The court noted that sale and rent back transactions were now "extremely rare" following action by then consumer protection regulator the Office of Fair Trading (OFT) and the Financial Services Authority (FSA). In 2012, the FSA reported that most of these transactions were "unaffordable and unsuitable" and should never have been sold. The Law Commission is currently reviewing the Land Registration Act to see whether provision should be made to protect occupiers from the impact of fraud, it said.