Beesley v New Century Group Ltd [2008] EWHC 3033 (QB) (16 December 2008)

Homeowners in financial difficulty entered a 'sale and rent back' scheme, selling their property at a significant undervalue. They sued the lenders, alleging they had constructive notice of undue influence. The court held one lender was put on inquiry, but another was not.

Facts

The claimants, Mr and Mrs Beesley, were homeowners in financial difficulty facing repossession. They entered into a ‘sale and rent back’ scheme promoted by New Century Group Limited (‘NCG’). In December 2005, they sold their property, valued at £325,000, for a stated price of £180,000 to Ms Wilkinson, a nominee for NCG. The Beesleys only received £20,000 from the sale. They were told they could continue living in the property as tenants with a right to buy it back. Ms Wilkinson financed the purchase with two mortgages: a first charge from GE Money Home Finance Limited (‘GE Money’) for £198,000 and a second from Southern Pacific Mortgages Limited (‘SPM’) for £27,000. When NCG went into administration, the mortgage payments ceased and the lenders sought possession. The Beesleys brought a claim to set aside the transaction and the mortgages, alleging undue influence by NCG and that the transaction was an unconscionable bargain. This hearing concerned applications for summary judgment by the lenders, GE Money and SPM.

Issues

The central legal issues before the court were:
1. Whether the Beesleys had a real prospect of establishing that the transaction was procured by the presumed undue influence of NCG.
2. Whether the Beesleys had a real prospect of establishing that the transaction was an unconscionable bargain.
3. If so, whether the lenders (GE Money and SPM) were fixed with constructive notice of the impropriety, which would make the mortgages unenforceable against the Beesleys. This involved applying the principles set out in Barclays Bank plc v O’Brien.
4. Whether the Beesleys had a real prospect of success in a separate claim of misrepresentation against GE Money.

Judgment

Mr Justice Teare delivered the judgment, dealing with each lender’s application separately.

Undue Influence and Unconscionable Bargain

The judge found it was ‘strongly arguable’ that the relationship between the Beesleys and NCG was one of trust and confidence, giving rise to a presumption of undue influence. The transaction was manifestly to the disadvantage of the Beesleys. Equally, he found it ‘strongly arguable’ that the transaction was an unconscionable bargain, given the Beesleys’ financial vulnerability, the substantial undervalue, and the lack of independent advice.

Constructive Notice – GE Money

The key question was whether GE Money was ‘put on inquiry’ of the impropriety. The judge determined that they were. The transaction was not a standard mortgage for a home purchase; it involved the vendors (the Beesleys) remaining in occupation as tenants post-completion. The judge stated:

The combination of a sale at an undervalue with the vendors remaining in occupation as tenants would, in my judgment, put a lender on inquiry in the circumstances of the present case.

He noted that a lender, aware of such facts, ought to appreciate the risk that the sellers were vulnerable and that the transaction might be improper. As GE Money was put on inquiry, it had to take reasonable steps to satisfy itself that the Beesleys’ consent was properly obtained. GE Money had not communicated with the Beesleys at all and could not show it had taken any such steps. Therefore, the Beesleys’ claim against GE Money based on undue influence and unconscionable bargain had a real prospect of success. The application for summary judgment on this ground was dismissed.

Constructive Notice – Southern Pacific Mortgages (SPM)

In contrast, the judge found that SPM, the second mortgagee, was not put on inquiry. SPM had no direct knowledge that the Beesleys were the vendors or that they would remain in occupation. The mortgage application and valuation report provided to SPM stated the property would be vacant on completion. There was nothing in the information available to SPM to suggest a ‘sale and rent back’ arrangement or the involvement of the previous owners. The judge concluded:

In these circumstances I have concluded that there was nothing to put SPM on inquiry as to any impropriety which may have existed as between the Claimants and NCG… There is therefore no real prospect of the Claimants being able to fix SPM with constructive notice of the undue influence or unconscionable bargain.

Consequently, SPM’s application for summary judgment was granted and the claim against it was dismissed.

Misrepresentation Claim Against GE Money

The court struck out the claim for misrepresentation against GE Money, finding it had no real prospect of success because the Beesleys could not establish that they had seen or relied upon the marketing brochure which formed the basis of the claim.

Implications

This case is a significant authority on the application of the doctrine of constructive notice to ‘sale and rent back’ schemes. It clarifies that a lender who knows the vendor is selling their home at an undervalue and remaining in occupation as a tenant is put on inquiry as to potential undue influence or other impropriety. The decision underscores the duty of lenders in non-standard transactions to be alive to the risk of wrongdoing and, if put on inquiry, to take reasonable steps to ensure the vulnerable party is properly advised. It also demonstrates that a lender’s liability depends on the specific knowledge available to it, creating a distinction between a primary lender with more information and a secondary lender who may be unaware of the true nature of the transaction.

Verdict: The court dismissed the summary judgment application made by the defendant GE Money Home Finance Limited in respect of the claims of undue influence and unconscionable bargain. The court struck out the claim for misrepresentation against GE Money. The court granted the summary judgment application made by the defendant Southern Pacific Mortgages Limited, and the claim against it was dismissed.

Source: Beesley v New Century Group Ltd [2008] EWHC 3033 (QB) (16 December 2008)