The Supreme Court judgment in Scott v Southern Pacific Mortgages Ltd & Ors [2014] UKSC 52 relates to a residential property sale and lease back (equity release) scheme that went badly wrong for the owners of various properties in the North East. The finding of the Supreme Court confirms how badly wrong the scheme went. However, the reasoning given by the Court raises issues for transactions beyond those in this case.
In order to obtain a release from mortgage debt, each owner had sold his/her property to a nominee appointed by North East Property Buyers Ltd (NEPB) on the strength of promises given by NEPB that the owner could remain in possession of the property as a tenant on various terms. Each property acquired by NEPB was purchased with loan finance secured by way of a contemporaneous legal charge. NEPB defaulted substantially under those charges. The question was whether the rights of the owners to a lease back – either promised rights, or granted rights – were binding on the claimant mortgagees. The Court of Appeal had held that any right of an owner to a lease back could not have arisen prior to creation of the legal charge, since the charge had been created contemporaneously both with the transfer to NEPB, and also the owner’s contract to sell to NEPB. In each case, there was no scintilla of time between NEPB’s purchase and contemporaneous mortgage of a property during which an owner’s interest could bite on the title and bind a mortgagee.
The Supreme Court also held that the mortgagees were not subject to the owners’ rights, but for a different reason. It held that a contracting purchaser did not have the capacity to create a proprietary right (i.e. an interest capable of binding a mortgagee) over the property it was acquiring until the purchaser had acquired the legal estate. Despite itself enjoying an equitable interest from exchange, it could not confer a proprietary right upon a third party until the legal estate had been acquired. Accordingly, the owners’ rights were nothing more than personal rights enforceable in contract against NEPB. Lady Hale said that a “purchaser could not create an interest which was capable of being a protected interest for the purpose of the [LRA 2002] Act until she had acquired the legal estate.”
This is significant. Practitioners should consider:
- How does a seller, in a sale and lease back transaction, ensure that any mortgagee of the buyer’s interest will be bound by the lease back?
- How does a sub-buyer protect a sub-sale contract by registration, given that the sub-vendor cannot confer on the sub-buyer anything more than a personal right?
These issues will be considered in detail in the November issue of the CPI Update, to be published at the end of this month.