Scott v Southern Pacific Mortgages Ltd & Ors [2014] UKSC 52

Homeowners in financial difficulty sold their homes to purchasers under sale and rent back schemes, relying on promises they could remain as tenants. The purchasers financed the acquisitions through mortgages that prohibited such tenancies and later defaulted. The Supreme Court held the vendors' rights were merely personal, not proprietary, and could not override the lenders' charges.

Facts

The appeal arose from one of ten test cases concerning sale and rent back transactions during a period when such schemes were common. Home owners in financial difficulties, including Mrs Rosemary Scott, were persuaded to sell their properties to nominees for an entity called North East Property Buyers (NEPB) at a discount, on the promise that they could remain in occupation as tenants, often with additional inducements such as future lump sum payments.

Mrs Scott sold her Longbenton home to Ms Amee Wilkinson (a nominee for NEPB) for £135,000 in August 2005, having been assured by a Mr Foster that she could remain indefinitely at a discounted rent and would receive a £15,000 loyalty payment after ten years. The purchaser financed the acquisition through a buy-to-let mortgage from Southern Pacific Mortgages Ltd. Exchange of contracts, transfer and mortgage all took place on the same day. Neither the promised rights of occupation nor the tenancies subsequently granted were permitted under the lenders’ mortgage terms. The purchasers defaulted and the lenders sought possession.

Issues

The court identified two principal questions arising under section 29(2)(a)(ii) of, and Schedule 3, paragraph 2 to, the Land Registration Act 2002:

1. 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 merely personal rights.
2. Whether, even if such equitable rights arose, the rationale of Abbey National Building Society v Cann [1991] 1 AC 56 applied so that the acquisition of the legal estate and the grant of the charge constituted one indivisible transaction, precluding priority.

Arguments

The vendors

The vendors argued that from the moment of exchange of contracts they acquired equitable proprietary rights (either by constructive trust or proprietary estoppel) carved out of the purchasers’ proprietary interest as contracting buyers. They relied on section 116 of the 2002 Act, which declares that an equity by estoppel or mere equity has effect from the time the equity arises as an interest capable of binding successors in title. They further contended that the transactions were effectively sales subject to a reservation of leaseback, so Cann was distinguishable.

The lenders

The lenders argued that the vendors’ rights were purely personal against the purchasers until the legal estate was acquired on completion, at which point the estoppel would be ‘fed’. By that stage, applying Cann, the acquisition of the legal estate and the grant of the charge were one indivisible transaction, so the vendors could not assert priority. They also contended that contract, conveyance and mortgage were all part of one indivisible transaction.

Judgment

The Supreme Court unanimously dismissed the appeal.

Lord Collins (with whom Lord Sumption agreed)

Lord Collins held that a purchaser prior to acquisition of the legal estate cannot grant equitable proprietary rights, only personal rights. Although a vendor after exchange holds on trust for the purchaser in a qualified sense, the purchaser’s interest does not enable him to confer proprietary rights on third parties before completion. The authorities describing the vendor as trustee are heavily qualified, and the rule that the purchaser becomes owner in equity applies only between the parties to the contract and cannot affect the interests of others.

Section 116 of the 2002 Act does not assist because it is expressly subject to the priority rules and presupposes that the equity arises against a legal owner. The interests capable of overriding under Schedule 3, paragraph 2 must be proprietary in nature, and section 132(3)(b) makes clear that references to interests affecting an estate mean adverse rights affecting title. Where rights derive from a person without the legal estate, they require to be ‘fed’ by acquisition of the legal estate.

Consequently the vendors acquired only personal rights on exchange. Those rights would become proprietary only on completion, at which point Cann applied and the acquisition of the legal estate and grant of charge were one indivisible transaction. Lord Collins additionally held that, in his view, contract, conveyance and mortgage were all part of one indivisible transaction, endorsing Nationwide Anglia Building Society v Ahmed (1995) 70 P & CR 381.

Lady Hale

Lady Hale agreed reluctantly with the primary conclusion that the purchaser could not confer proprietary rights before completion, because until then the purchaser had no legal estate out of which a tenancy by estoppel or similar interest could be carved. However, she disagreed on the second point, considering that the contract of sale was not part of one indivisible transaction with the conveyance and mortgage, since the lender is not party to the sale contract and the transactions can be temporally and factually separate. She expressed unease about the harshness of the result where vendors have been tricked and lenders have failed to heed warning signs, welcoming the Law Commission’s review of the 2002 Act.

Lord Wilson and Lord Reed

They agreed with Lady Hale on the indivisibility point, which was not part of the reasons for the decision.

Implications

The decision confirms that a purchaser of registered land, prior to completion, cannot grant proprietary interests in the land binding on third parties such as mortgagees. Any equity or estoppel arising in favour of a vendor from the purchaser’s promises remains merely personal until fed by the acquisition of the legal estate, and applying Cann, at that moment the acquisition and mortgage are one indivisible transaction leaving the purchaser with only an equity of redemption.

The ruling reinforces the security of registered secured lending: mortgage lenders financing acquisitions in the standard way will not be defeated by promises made by the borrower to the vendor before or at completion. This is significant for the approximately 900,000 domestic conveyancing transactions annually in England and Wales.

The decision leaves the harsh consequences for vulnerable vendors who were victims of sale and rent back frauds. The Court expressly noted that such vendors may have claims against the Solicitors’ Compensation Fund and expressed hope that lenders would consider mitigating hardship before enforcing security. Lady Hale identified the tension between innocent vendors and innocent lenders as an area meriting reform, noting the Law Commission’s forthcoming review.

A majority of the Court (Lady Hale, Lord Wilson, Lord Reed) did not endorse the wider proposition that contract, conveyance and mortgage form a single indivisible transaction; that remains a point on which the leading judgment (Lord Collins, with Lord Sumption) stands as obiter and where authority such as Nationwide Anglia Building Society v Ahmed is not universally accepted at the highest level.

Verdict: Appeal dismissed. The vendors acquired only personal rights against the purchasers on exchange of contracts, not proprietary rights, and those rights only became proprietary upon completion, at which point (applying Abbey National Building Society v Cann) the acquisition of the legal estate and the grant of the charge were one indivisible transaction, so the vendors’ interests could not take priority over the lenders’ charges under section 29(2)(a)(ii) of and Schedule 3, paragraph 2 to the Land Registration Act 2002.

Source: Scott v Southern Pacific Mortgages Ltd & Ors [2014] UKSC 52