Sale and leaseback tenant loses test case fight to stay in home

A tenant of a sale and leaseback scheme, who claims she was promised she could stay in her house for life but faces being forced to leave following test case rulings against her, has lost her final appeal at the Supreme Court. Mrs Scott was one of initially 10 test-case tenants who fought possession proceedings against them in the courts, arguing that they had an equitable interest in the property from the moment of exchange of contracts, which amounted to an  unregistered interest given priority over lender’s charges by section 29(2)(a)(ii) of, and Schedule 3, paragraph 2 to, the Land Registration Act 2002. She alone took the case to the Supreme Court after first the High Court and then the Court of Appeal found against the tenants on a key preliminary issue, concluding that no such equitable interest arose in respect of her home in Longbenton, Newcastle upon Tyne. But, though Lord Collins offered his sympathy and Lady Hale expressed her unease with the result, the Court unanimously ruled on 22 October that the nominee purchaser of Mrs Scott’s property for North East Property Buyers (NEPB), Amee Wilkinson, could not confer equitable proprietary rights on Mrs Scott at any time before completion of the purchase. Lord Collins said: “It is impossible not to feel great sympathy with Mrs Scott and the former homeowners in her position, who may have been not only the victims of a fraud which tricked them out of their homes, but also of unprofessional and dishonest behaviour by the solicitors appointed to act for them. They may have claims against the Solicitors’ Compensation Fund, but the fact remains that they may lose their homes if they do not succeed on this appeal.” But he said that overriding interests of the kind claimed are a “major obstacle” to the aim of the 2002 Act of creating a simplified conveyancing system, adding: “There is also an important public interest in the security of registered transactions. There are more than 23m registered titles in England and Wales, and each month the Land Registry may handle up to 75,000 house sales, of which the vast majority will be financed by secured loans.” He concluded that she and the other the vendors in her position “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”. Her rights would only become proprietary when the nominee purchaser acquired the legal estate, at which time the grant of the charge in favour of Southern Pacific Mortgages also took effect as part of one indivisible transaction. As a result, the lenders’ rights were not subject to Mrs Scott’s right to occupation. Lady Hale added: “This case has been decided on the simple basis that the purchaser of land cannot create a proprietary interest in the land, which is capable of being an overriding interest, until his contract has been completed. If all the purchaser ever acquires is an equity of redemption, he cannot create an interest which is inconsistent with the terms of his mortgage.” Lord Collins said that the question whether the decision in Abbey National Building Society v Cann, to the effect that conveyance and mortgage are one transaction, applies to a proprietary equitable interest arising at the time of a contract of sale, did not arise in this case, and that it was difficult to see how it could arise. However, he felt that it was implicit in Cann that not just the conveyance and mortgage, but also the contract, were all indivisible parts of the transaction, and so even if Mrs Scott had had equitable rights of a proprietary nature against Ms Wilkinson arising on exchange of contracts, the mortgage would have taken priority. Lady Hale did not agree that the finding of an indivisible transaction in Cann extended to the contract of sale, and said that to include the contract would create confusion, but said she was “reluctantly driven” to the conclusion must fail for the same reasons as Lord Collins: “The purchaser was not in a position either at the date of exchange of contracts or at any time up until completion of the purchase to confer equitable proprietary, as opposed to merely personal, rights on the vendor.” She described this as a “harsh result”, and asked: “Should there not come a point when a vendor who has been tricked out of her property can assert her rights even against a subsequent purchaser or mortgagee?” Welcoming the Law Commission’s decision to carry out a wide-ranging review of the 2002 Act, she said: “There ought to be some middle way between the ‘all or nothing’ approach of the present law.” Setting the background to the action, Lord Collins said: “The transactions with which this appeal is concerned arose during a period when sale and rent-back transactions were common. The deals were often sold to home owners in financial difficulties and the firms selling them often told the home owners that they would be able to stay in their homes for years, when in fact the tenancies were rarely granted for more than six or twelve months. Many firms financed the purchase of the properties through secured borrowing, and former owners were being evicted following proceedings for possession by mortgage lenders after the purchasers defaulted on their loans. “The homeowners did not fully understand the risks involved, and the OFT’s research found that solicitors provided by the sale and rent-back companies to provide advice to the seller were sometimes suspected to be acting for the companies as well. By the time of the study the OFT estimated that there were 1,000 firms involved in selling the schemes and about 50,000 transactions.” However, he said that in 2009 the Financial Services Authority recommended a fast regulatory response, and in the same year sale and rent-back transactions became a regulated activity under section 19 of the Financial Services and Markets Act 2000. He added: “As a result, in February 2012 the FSA reported that most sale and rent-back transactions were unaffordable or unsuitable and should never have been sold, but that in practice the entire market had shut down. They are now very rare.” In the ten test cases brought to court, he said that the purchasers bought the homes with the assistance of mortgages from lenders, who were not given notice of the promises to the homeowners. In each case the purchasers/mortgagors were nominees for NEPB, but there are around another 90 cases in the Newcastle area involving NEPB and as many as 20 different lenders, as well as many cases in other parts of England involving similar schemes. He said: “Criminal charges are pending and the original owners and the lenders may have been the victims of a fraud. Some of the solicitors involved in the transactions were subsequently the subject of disciplinary proceedings. Ultimately this appeal will determine which of the innocent parties will bear the consequences.” In Mrs Scott’s case, he said that she sold her home for  £135,000 – a significant undervalue – in 2005 and was told that she could remain as a tenant at a discounted rent of £250 per month, and receive a further lump sum of £15,000 if she stayed for 10 years. She was assured that she could stay as long as she liked, and that if she were to die the tenancy would be automatically transferred into her son’s name and he would receive the lump sum at the end of the 10-year period. The nominee purchaser obtained a buy-to-let interest-only mortgage from Southern Pacific Mortgages on condition that only assured shorthold tenancies of up to one year could be granted, but, in breach of those terms, a two-year tenancy was granted to Mrs Scott four days after completion of the sale. In 2009 Mrs Scott discovered that a possession order had been made in favour of Southern Pacific, following defaults by Ms Wilkinson on the mortgage. Click here to read transcript: Scott v Southern Pacific and another Scott v Southern Pacific Mortgages Ltd and another Supreme Court (Lady Hale, Lord Wilson, Lord Sumption, Lord Reed and Lord Collins) 22 October 2014 Bryan McGuire QC and James Stark (Instructed by Paula Harris, David Gray Solicitors LLP) for the appellant Justin Fenwick QC, Nicole Sandells and Nicholas Broomfield (Instructed by Paul Heeley, TLT LLP) for the first respondent Justin Fenwick QC, Nicole Sandells and Nicholas Broomfield (Instructed by Ian Drew, Walker Morris LLP) for the second respondent Lesley Anderson QC and Daniel Gatty (Instructed by Richard Pitt, Eversheds LLP) for the intervener