Supreme Court Decides on Sale and Rent Back

On 22nd October 2014, the Supreme Court finally handed down judgment in the high profile case of Scott v Southern Pacific Mortgages [2014] UKSC 52, more commonly known as the ‘North East Property Buyers’ litigation.  Mortgage Express and The Mortgage Business PLC also participated in the proceedings as second Respondent and Intervener respectively.

Sale and Rent Back Schemes

This case concerned transactions known as ‘sale and rent back’ which became common in the 2000s until the regulators (the OFT and then the FSA) virtually wiped them out following investigation and complaints in 2008/2009.

Such schemes were described by the OFT in 2008 as a new type of transaction whereby firms (‘purchasers’) bought homes from individuals (‘vendors’), usually at a discount, and promised the former owners the right to remain in occupation as tenants for life.  The vendors, who were usually in financial difficulties, were attracted by the possibility of remaining in their property on such terms.

The purchases were regularly financed with secured lending.  When the purchaser companies began to default on their loan repayments, the vendors found themselves at risk of eviction, having not understood the risks involved.  This led to a number of test cases being brought to establish what, if any, rights the vendors had to remain in their properties, over and above the rights of the lender in seeking possession.

Background

Ten test cases were brought within which the above facts broadly applied.  The purchases had been financed by secured lending but the lenders were led to believe the purchases were at full value, with vacant possession being provided and tenancies intended for 6 months only.  Lenders’ terms and conditions usually prohibit anything longer than 12 months.

Following default, the lenders sought possession of the properties and the vendors unsurprisingly resisted, without success, at Leeds High Court.  The Court of Appeal also ruled in favour of the lenders, which led to the majority of cases settling.

There remained this test case which was heard at the Supreme Court.

The Legal Issues

The essence of the issue is described in the judgment as being:

 “…whether the home owners had interests whose priority was protected by virtue of section 29(2)(a)(ii) of, and Schedule 3, paragraph 2, to the Land Registration Act 2002.”

In other words, did the vendors have an interest capable of being an overriding interest at the time of the disposition of the properties?  If so, such interests would take priority to those of the mortgagees.

In a highly technical analysis of the current law, the Supreme Court sought to address two key questions in answering the above:

  1. Whether the purchasers were in a position at the date of exchange to confer proprietary rights on the vendors, as opposed to personal rights only; and

 

  1. Whether, even if the above were a possibility, the principles in Abbey National v Cann [1991] 1 AC 56 applied in this case. Namely, that where a purchaser relies on a bank loan for the completion of a purchase, the transactions of acquiring the estate and granting the charge are one indivisible transaction and an occupier cannot therefore assert against the lender an interest arising only on completion.

The Court’s Decision

The Supreme Court, in dismissing the appeal, essentially only had to deal with the first question above.

Lord Collins, giving the leading judgment stated:

“…the appeal should be dismissed on the principal ground that 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. 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…”

Lady Hale, Lord Collins and Lord Wilson agreed with the decision, though they differed in opinion on the indivisibility of the contract from the conveyance and the mortgage.  The schemes were, in reality, sales followed by rent backs, and the vendors could not claim priority over the lender. Personal rights were granted which were only enforceable against the purchasers and not the lenders.

Conclusion

Lady Hales referred to the outcome as ‘a harsh result’, and it is difficult not to feel sympathy for those vendors who have fallen victim to the transactions.  However, lenders were ultimately also misled and will breathe a collective sigh of relief at the outcome.  Hundreds of possession cases have been stayed at County Court level and higher pending the outcome of this appeal, brought not only by lenders but also by LPA Receivers who have sought to determine the tenancy agreements in place.

Lenders will now be able to take possession pursuant to their mortgage terms and conditions, and the vendors will no doubt look at other potential causes of action against the parties involved in the transactions separate to the lenders. Criminal charges are also pending.