Southern Pacific Mortgages Ltd and others v Scott

Sale of land – Overriding interest – Sale and leaseback – Land Registration Act 2002 – Sales of residential properties with promise by purchaser that vendors entitled to remain in their homes under tenancies – No such tenancies mentioned in sale contracts – Purchasers taking out buy-to-let mortgages to fund purchases – Sales and mortgages executed on same day – Terms of mortgage precluding grant of rights promised by purchasers – Whether mortgage lenders entitled to possession where purchaser defaulting on mortgages – Whether former homeowners acquiring equitable proprietary rights capable of amounting to overriding interests within Schedule 3 to 2002 Act – Whether those rights taking priority over lender’s charge – Appeal dismissed The appellant was one of a number of people who, after getting into financial difficulties, sold their homes to companies under “sale and rent back” arrangements in which the company purchased the property at a discount and granted a tenancy back to the former homeowner. Although the companies promised the homeowners that they would be able to stay in their homes, the sale agreements made no mention of this and the purchases were often financed by “buy to let” mortgage loans, the terms of which did not permit lettings other than assured shorthold tenancies for short fixed terms. The lenders were not notified of the promises that the companies had made to the former homeowners. Exchange of contracts, completion of the sales and execution of the mortgages all took place on the same day. Thereafter, the companies purported to grant tenancies to the homeowners for terms that were not permitted by the mortgage terms. In some cases, the purchaser company defaulted on the loan and the former homeowner was evicted following possession proceedings brought by the mortgage lender. Charges were later brought against certain of the companies, which were suspected to have perpetrated a fraud against the former homeowners and the lenders. A number of test cases were tried to determine the respective rights of the former homeowners, including the appellant, and of the mortgage lenders in that situation. The former homeowners contended that they retained an equitable interest in the property, which was an overriding interest protected by actual occupation so as to take priority over the lender’s charge by virtue of section 29(2)(a)(ii) of, and para 2 of Schedule 3 to, the Land Registration Act 2002. The issues were: (i) whether the equity that arose in the former homeowner’s favour from the facts of the transaction gave rise to a proprietary interest capable of being protected as an overriding interest within para 2 of Schedule 3, as opposed to purely personal rights; and (ii) even if a proprietary right arose, whether the sale of the legal estate and the grant of the charge were a single indivisible transaction, so as to prevent the homeowner from asserting against the lender an equitable interest that arose only on completion. In the courts below, both those points were decided against the former homeowners and the possession claims were allowed: see Various Mortgagors v Various Mortgagees [2010] EWHC 2991 (Ch) and, on appeal, Cook v Mortgage Business [2010] EWCA Civ 17; [2012] 1 WLR 1521; [2012] 1 EGLR 89. The appellant appealed to the Supreme Court. Held: The appeal was dismissed. (1) In order for an unregistered interest to override a registered disposition under para 2 of Schedule 3 to the 2002 Act, the unregistered interest had to be a proprietary interest affecting the legal estate in the property. Prior to acquiring the legal estate, a purchaser could not grant equitable rights of a proprietary character, as opposed to personal rights. Where a proprietary right was claimed to be derived from the rights of a person who did not have the legal estate, then the right needed to be “fed” by the acquisition of the legal estate before it could be asserted otherwise than personally. Although the purchaser under a contract of sale by registration acquired statutory rights to enforce its interests against third parties, that did not mean that it had proprietary rights for all purposes or could grant them to another: Cuthbertson v Irving (1859) 4 H&N 742, Bell v General Accident Fire & Life Assurance Corp Ltd [1998] L&TR 1; [1998] 1 EGLR 69 and Watson v Goldsbrough [1986] 1 EGLR 265 applied. The situation of the former homeowners was not analogous to that of an unpaid vendor, whose proprietary right in the form of a lien for the unpaid purchase price arose by law as the corollary of the purchaser’s equitable interest in the property. Nor could the former homeowners claim a proprietary interest by characterising the transaction as a sale only of a reversionary interest in the property, subject to the promised lease: Sargaison (HMIT) v Roberts [1969] 1 WLR 951 distinguished. The true nature of the transaction was a sale and leaseback. In the appellant’s case, the contract provided for the property to be transferred with “full title guarantee” and “vacant possession” and a transfer had been executed in the normal form. The purchaser companies could not grant an equitable tenancy that would bind the lenders before their purchase of the land was completed. The purchasers were not in a position at the date of exchange of contracts to confer equitable proprietary rights on the former homeowners, as opposed to personal rights only. The homeowners therefore acquired only personal rights against the purchasers when they agreed to sell on the strength of the purchasers’ promises regarding their entitlement to remain in occupation. Their rights would only became proprietary, so as to be capable of taking priority over a mortgage, when they were fed by the purchaser’s acquisition of the legal estate on completion. At that point, the acquisition of the legal estate and the grant of the charge to the mortgage lender would both take effect as a single indivisible transaction; accordingly, the former owners could not assert against the lenders their interests arising only on completion. All that all the purchaser ever acquired was an equity of redemption, out of which it could not create an interest that was inconsistent with the terms of its mortgage: Abbey National Building Society v Cann [1991] 1 AC 56 applied. (2) In light of the above, no further issue arose as to whether the “indivisible transaction” analysis in Cann applied where the equitable interest of the occupier arose on exchange of contracts. The court nonetheless expressed its views on that issue. Per Lord Collins and Lord Sumption: It was implicit in Cann that the contract, conveyance and mortgage were all indivisible. While the contract of sale had separate legal effects, it would be unrealistic to treat the contract for present purposes as a divisible element in the process. Accordingly, even if the former homeowners had acquired equitable rights of a proprietary nature on exchange of contracts, the mortgages would still have taken priority. Per Lady Hale, Lady Hale, Lord Wilson and Lord Reed: The contract for sale could not be regarded as indivisible from the conveyance and mortgage. The contract was not a “tripartite” transaction to which vendor, purchaser and lender were all party, but was an entirely separate matter between vendor and purchaser in which the lender was not involved. Bryan McGuire QC and James Stark (instructed by David Gray Solicitors LLP, of Newcastle upon Tyne) appeared for the appellant; Justin Fenwick QC, Nicole Sandells and Nicholas Broomfield (instructed by TLT LLP for the first respondent and Walker Morris LLP for the second respondent, Mortgage Express) appeared for respondents; Lesley Anderson QC and Daniel Gatty (instructed by Eversheds LLP) appeared for the intervener, The Mortgage Business plc. Sally Dobson, barrister Click here to read transcript: Southern Pacific Mortgages Ltd and others v Scott