Supreme Court ruling in eagerly awaited "sale and rent back" test case

The Supreme Court faced the time honoured question of what happens in a fraudulent transaction where there are two innocent parties with competing claims…

The Supreme Court unanimously dismissed an appeal in Scott (appellant) v Southern Pacific Mortgages Limited (respondents), [2014] UKSC 52.

Background

This was an appeal of one of ten test cases in which home owners sold their properties under sale and rent back schemes to a company, North East Property Buyers (NEPB). The owners were often in financial difficulties and were targeted by NEPB to sell their homes with promises that the sellers would retain the right to remain in their homes after the sale as long-term tenants. NEPB obtained loans from mortgage companies who were not told about the promises made to the sellers and there were no leases or tenancies listed in the sale contracts.

When the mortgage payments dried up, the lenders brought proceedings to repossess the properties which the original owners fought and lost both at first instance and on appeal. The key issue before the Supreme Court was whether the home owners had interests whose priority was protected by virtue of Schedule 3, paragraph 2 of the Land Registration Act 2002 – essentially, whether the original owners had overriding interests which defeated the lenders' claims. 

Judgment

The transactions were separate sales followed by rent backs which meant that at the time of exchange of contracts, the sellers could not claim a reserved interest under the contracts. Equally, the purchasers could not obtain any proprietary interest before completion so they could not create overriding interests in favour of the former owners that would bind the lenders.  This was crucial because at completion, since the finance was being provided by the lender at the same time as the purchase then there was no moment in time when the sellers' interests could take priority over the lenders' rights.

The Court made it clear that its judgment would decide which of the innocent parties would bear the consequences of the transactions. The Judges expressed their sympathy at the plight of the vendors but ultimately dismissed the appeal in the lenders' favour, on the relatively straightforward basis that a purchaser of land cannot create a proprietary interest in the land, which is capable of being an overriding interest, until their contract has been completed.  

RPC says…

Whilst the Judges unanimously dismissed the appeal, Lady Hale expressed some unease with the decision in circumstances where the original owners had been the victim of fraud.  She wondered whether the law failed to take into account "comparative innocence" in the sense that there must come a point where lenders failed to heed the obvious warning signs that the borrowers were not a good risk and noted that The Law Commission was due to review the 2002 Act, including the impact of fraud.

There was also some judicial criticism of the solicitors involved that the dubious (and in many cases, fraudulent) transactions would not have taken place if the solicitors had complied with their professional duties. However, it does appear that the cases considered by the Supreme Court were less about negligent conduct and more about palpably dishonest schemes perpetrated by NEPB and a small number of dishonest solicitors who acted on the transactions.

Lady's Hale's suggestion might be seen to be inviting the Law Commission to agree that any lender irresponsibility should be taken into account (although she said there was no evidence the lenders acted irresponsibly in this case). If there is evidence of such irresponsibility then that might be a justification to postpone the interests of lenders to those of innocent sellers notwithstanding the strict legal position – watch this space.