Clarification from the Supreme Court in sale and rent back transaction
Secured Lenders able to gain possession from vendors in occupation
On Wednesday (22 October 2014) the Supreme Court handed down its long awaited judgment in a test case of preliminary issues in the North East Property Buyers litigation following a hearing in March this year. The Supreme Court agreed with the Court of Appeal and unanimously upheld the decision at first instance that vendors in occupation in so called sale and rent back transactions had no rights entitling them to remain in occupation of their homes when faced with repossession proceedings by a secured mortgage lender. Thus the decision paves the way for lenders to seek, and they will likely to be granted, possession over these properties if the purchaser defaults on the mortgage. Whilst disputes between lender and vendor appear to now be over, Lord Collins points out specifically that claims between vendors and their solicitors may now arise.
This case involved a number of sale and rent back transactions which took place before 2009 when the practice became regulated under the Section 19 of the Financial Services and Markets Act 2000. The practice became a regulated one following OFT research produced in 2008 which highlighted that a regulatory response was needed to protect innocent consumers.
In simple terms the structure of the transactions in the cases is as follows:
Vendors, usually suffering financial difficulties and hardship, are persuaded to sell their homes after being promised a right to remain in their homes for life as a tenant after the sale.
A purchaser buys the property usually at a discount or undervalue and obtains the funds by way of a mortgage. In this case the properties were purchased with buy-to-let mortgages.
The lender is not informed of the arrangement with the vendor and believes that, the property is being purchased with vacant possession and for full value. The mortgage conditions generally only permitted assured short hold tenancies of not more than 12 months.
Exchange of contracts and completion of the transfer between the vendor and the nominee purchaser and the execution of mortgage took place on the same day.
Neither the contract for sale, nor the transfer, documented the agreement between the vendor and the nominee purchaser and the transaction completed without the lender’s knowledge of the existence of, and the promises made to, the vendor.
The purchasers eventually defaulted on payment of the mortgage and the lenders sought possession of the properties.
The Supreme Court had to determine the following preliminary issues:
Whether the purchasers were in a position at the date of exchange of contracts to confer equitable proprietary rights on the vendors, as opposed to personal rights only.
If the vendors acquired more than merely personal rights would the principles from Abbey National Building Society v Cann  apply.
The case of Abbey National Building Society v Cann also involved a case concerning overriding interests and the Court in that case had to determine, in very simple terms, when the overriding interest took effect. That case involved issues of actual occupation by the party claiming a prior interest. The Court in that case held that where a purchaser acquires a property using a mortgage, the transactions granting the legal estate and acquiring the first charge is one indivisible transaction. The effect of this is that there is no point in time when the purchaser acquires the legal estate free from the mortgage therefore was no point in time at which the overriding interest could attach to the legal estate, before the legal charge was executed, to take priority over the chargor.
The test case involved the case of Mrs Scott who had run into financial difficulties after her husband had left. In 2005, after failing to achieve a price near the marketed price of the property (£156,000), Mrs Scott was approached by an individual who indicated that he knew of a party who was looking for properties in the area and would buy it from her and she could rent it back from him. Mrs Scott was promised that she could live in the property for the rest of her life and that upon her death her tenancy would pass to her son. Mrs Scott was told that the property would be purchased for £135,000 and that she could rent the property at a discount price of £250 per month, if she remained in the property she would receive a lump sum after ten years which would make up the reduction in purchase price. The transaction duly completed. After completion Mrs Scott received a document which confirmed that she was to remain in the property as a tenant and that she would receive a lump sum payment after ten years.
It was not until three years later, in 2008, that Mrs Scott became aware that there was a mortgage on the property and then shortly thereafter that she became aware that possession proceedings had taken place, without her knowledge, and lender had been granted an Order for possession. Mrs Scott obtained a suspension of the warrant for possession and joined the proceedings as a Defendant and thereafter claimed an overriding interest in the property.
The Supreme Court dismissed the vendors appeal. The Supreme Court unanimously found that the purchasers could not confer equitable proprietary rights in the properties at any time before completion of the purchase and there was no interest which could claim priority over the lender’s charge. The second issue did not therefore arise but three of the judges would have taken a different view on that issue. The significant aspect of the decision is that the Supreme Court accepted the principle that, between exchange and completion a purchaser cannot create a proprietary interest in land until the contract has been completed.
What does this decision mean now?
The decision has implications for solicitors and their professional indemnity insurers as it is suggested that the vendors who may now be evicted from their homes may now try to seek a remedy from the solicitors who represented them in these transactions. It also has implications for the law of real property in that it has clarified that the rights acquired by the vendors in these cases were personal only in nature , not proprietary and therefore as unregistered interests they did not have priority over the lenders charges under the Land Registration Act 2002.
View the Supreme Court judgment.
This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.