Sale and Rent Back – Priority over charge, Round 1

North East Property Buyers Litigation [2010] EWHC 2991 (Ch) [Not on Bailii yet. Available on Lawtel or here]

We noted this case was forthcoming a month ago. Judgement was given on 19 November. Thanks to James Stark, we’ve got a transcript. Thanks to being very busy, we’re late reporting it.

This is a rolled up hearing of 10 different claims, with some 90 others stayed awaiting the outcome. In each case, albeit under varying arrangements, a sale and rent back company, North East Property Buyers, had bought the former home owners’ property with, so the former owners’ claimed, an agreement that they would be granted an assured shorthold tenancy and (in most cases) that there would be a further payment from the lump sum after 10 years if they remained in occupation and paid the rent. In each case NEPB, or subsiduary, took out a mortgage to purchase the property. The exchange of contracts and completion took place on the same day, in each case. The contracts did not mention the tenancies.

The levels of rent and fixed terms of the tenancies asserted to have be agreed varied, from no rent to market rent and from 6 months to ‘the life of the tenant’. Before housing lawyers start snorting, it should be noted that any issues about the validity of the tenancies were expressly put off to a later stage, this being a hearing on a preliminary issue.

The claims were for possession by the mortgage lenders, NEBL having defaulted on payments. The Defendants were the occupant ‘tenants’.

This preliminary issues were:
i) Could the alleged interests of the tenants be capable of affecting the estates immediately before or at the time of disposition (being the transfer and/or charge of the property) by reference to S.29 Land Registration Act 2002, such that it could be an overriding interest under paragraph 2 and/or 3 Schedule 3 of the 2002 Act.
ii) Could the alleged tenancy agreements have priority over the Claimants’ charges under s.29(4) of the 2002 Act if the Claimants did not have the benefit of a priority search, or even if they did.
iii) Could the Claimants’ priority be affected by notice of promises made and the circumstances of the transaction by virtue of their agents knowledge if passed on, or if not passed on to the Claimant mortgagee.

The first issue predominated discussion.

The Defendants argued that Redstone v Welch and Jackson [2009] EG 98 (our report here) should be followed in interpreting Abbey National v Cann [1991] AC 56 and Whale v Via Systems [2002] EWCA Civ 480. The Court should look at the reality of the situation. Here it was a sale and lease back to the occupiers, based upon promises by NEPB to the occupiers. In the circumstances NEPB’s title was always subject to the occupiers equitable rights, and this was all that was charged to the mortgagees.

While Redstone was a County Court decision and not binding, it was a considered case following full argument and had been approved in Delaney v Chen [2010] EWHC 6 (Ch) (our report here).

The mortgagees variously argued that NEPB did not have an interest in the land prior to completion sufficient to create a proprietary estoppel that would hold against the claimants. Secondly there was no time interval between contract and completion in these cases. Contract and completion were part of the same transaction, Nationwide v Ahmed [1995]  70 P&CR 381. Thirdly, Law of Property Act 1925 Section 63 meant that it was implied that the whole estate passed in the transactions notwithstanding any alleged equitable interests.

Redstone, they argued, was both unorthodox and wrong, and inconsistent with Cann. Chen did not decide issues of priority and so the approval of Redstone in that case was not to the point.

On the other issues:

On ii), which only applied for leases of less of 7 years granted prior to the date of the registration of the charge, the Defendants argued that the effect of s.29(4) with s.23 and s.24 of Land Registration Act 2002 was that the interest of the lessee has priority over that of the mortgagee, and this was argued to also be the case even where the mortgagees have carried out a priority search and applied for registration of the charge within the priority period, as the priority protection of s.72 of the Act does not apply to a deemed registration under s.29(4).

The Claimants argued that this would create an anomaly that Parliament could not have intended. S. 23 should be read as meaning that while a person entitled to be registered had the power to exercise the owner’s powers pending registration, this only gave rise to an equitable interest pending registration. Prior to registration the interest was only equitable and the owner of the equitable interest could not create a legal interest. For this reason NEPB’s promises prior to registration of their title could not create a legal interest for the tenants prior to the registration of the mortgagees’ charges.

On iii) was barely argued. It was pretty much agreed that priority was governed by the 2002 Act and that knowledge was irrelevant.

The Court set out one example case as a typical one of a class. There was a ‘buy to let’ mortgage application, indicating there would be a 6 month AST let. The mortgagee offered £95,750 on a valuation of £115,000. Of the £95,750, all but £41,029 discharged the previous mortgage, £3,029 was paid to the vendors (the new tenants) and NEPB received £38,000.

The transaction, contract and completion was completed in a day. There was nothing in the contract to suggest a lease in favour of the vendors or anything other than vacant possession.

Both the vendors/tenants and the mortgagees assert they are victims of mortgage fraud.

The Court held:

On i) – the most significant issue. Cann and Whale both held that any gap in time between transfer and registration of a charge was illusory, given that the agreement for a mortgage had been entered into before (and was the reason why) the purchase could take place.

Ahmed held that an agreement to occupy did not take precedence over a charge.

So the decision in Cann means that contractual proprietary rights are excluded where contract, conveyance and charge took place on the same day, with Ahmed supporting the view that this also applied to a vendor apparently reserving to himself a proprietary right of occupation in the contract for sale.

Hardy v Fowle [2007] EWHC 2423 (Ch) considered – here it was held that a grant of a lease which was a condition of a contract for sale did not take priority over the mortgagee’s charge, despite the completion having taken place some time after exchange of contracts. The purchase entirely depended on the mortgage (and charge) in a way that it did not depend on the grant of lease, and for that reason in any apparent simultaneous grant of competing and incompatible interests in the property, the more vital to the transaction would take priority. The mortgagees were not bound by the lease. Cann approved and relied upon. The Court noted that to distinguish the present cases would mean a vendor with an equitable right to a leaseback from the purchaser would be in a different, better, position to a third party to whom a purchaser is contractually bound to grant a lease.

Redstone was to all relevant purposes factually indistinguishable from the present cases. In Redstone the finding was that the agreement to grant an AST to the vendor was a vital reason for the transaction to take place. On that basis, the purchaser never had more than title subject to the ‘tenants’ equitable rights and it was this burdened interest that was subject to the charge. In Chen, in the High Court, a sale was held to be subject to a lease for the vendors, Redstone agreed with.

However, the mortgagees’ rights held to have priority over any equitable rights the occupiers may have had against NEPB as a result of representations. Redstone not followed and Chen, if the point was on priority rather than the facts of the transaction, respectfully disagreed with.

Redstone went beyond Cann and Whale. Too heavy a reliance was placed on whether a transaction was indissoluble. As per Fowle, where two incompatible interests in land are created simultaneously, one must take priority, and the Cann line of precedent was that the mortgagee’s interest took precedence. Those cases show that a person claiming an equitable interest cannot normally get priority.

On the contract argument, on the present cases this failed because there was no ‘gap in time’ between exchange and completion. In any event, the TR1s signed by the vendors transferred any such legal interest they might have in the property as there was nothing in the contracts or TR1s to indicate otherwise, s.63 Land Registration Act 2002.

On the second issue, most of the tenancies in these cases were below 7 years and not registrable. In almost all cases, the mortgagees’ charge had been registered within the priority search period. On the argument that s.23 and 24 allow people entitled to be registered as owners to deal with the property as if they are the registered owner, such that s.29(4) has the meaning that the grant of a lease has effect as if the disposition were registered at the time of grant, it was noted in Redstone that this was a curious effect. But contrary to Redstone, the section should be read as only having effect as grant of a legal (rather than equitable) lease once the purchaser acquires legal title, or alternatively, s.29(4) applies to a grant out of a registered estate. On either alternative, Redstone is disagreed with. The question of priority searches does not arise on this view.

On the third issue, this did not arise. Priority was governed by the 2002 Act,with no question of knowledge actual or constructive arising, outside of the overriding interests under s.70 of the Act.

So, on the preliminary issues, the Defendant occupiers lost on all counts.

Comment
This is a lengthy and detailed decision. but on the crucial issue – whether an equitable interest in the form of the agreement for a lease or tenancy can take priority over a legal mortgage charge – and on the ‘disagreement’ with Redstone, the argument is rather slimmer. In short it boils down to a view that an agreement for a tenancy, despite being a condition precedent for the sale, cannot normally take priority where there are ‘simultaneous competing interests in the property’ being granted, without ‘something more’ and the grant of a tenancy by a purchaser who does not yet have a legal interest in the land is not ‘something’ more. But this is solely on the basis that precedent in the form of Cann, Whale and Fowle indicate that the mortgagee takes priority. Quite what might constitute the ‘something more’ upon which the whole transaction may depend, such that the equitable interest would take priority does not take up much consideration, and the view on in Redstone just disagreed with.

One would expect this issue to now got the Court of Appeal, and based on the differing views in the High Court, there is clear merit in it doing so.

About Giles Peaker

Giles Peaker is a solicitor and partner in the Housing and Public Law team at Anthony Gold Solicitors in South London. You can find him on Linkedin and on Twitter. Known as NL round these parts, and still is Nearly Legal on Google +.
Posted in Assured Shorthold tenancy, Housing law - All, Mortgage possession, Possession and tagged , .

7 Comments

  1. Blimey, that’s an interesting and important decision. Initial view is that Cann is surely distinguishable as it was a “classic” purchase case. Daisy (Cann)’s occupation of the purchased property at best was 25 minutes prior to completion (her furniture), so the mortgagee had no opportunity to make enquiries of her; whereas here, the vendor-tenants were in occupation and, had they been asked by the mortgagees what their rights were, if any, they would surely have spilled the beans on the arrangement. Sch 3, para 2(b) doesn’t quite fit, but an analogy with the classic Kingsnorth v Tizard? This raises the question as to the relevance of knowledge in the scheme of the LRA – the locus classicus of Lord Wilberforce in Boland, cited by the judge here, must be strictly correct, but needs to be taken with a pinch of salt.

    Then there’s the other problem that their rights were no more than personal at the time of the conveyance to the mortgagees – but they were, in a sense, ambulatory (and, if you use the scintilla temporis argument for the mortgagees, then why not for the vendor-tenants?). This is a rather more difficult question: they had a promise on which they relied, I suppose; but, at the time the promise was made, NEPB had no title to make the promise (cf Bruton v L&Q). But, if PE/CT follows, the real question comes down to whether the facts can be shoehorned into section 116? I doubt it.

    The other option I wondered about was whether there might be an undue influence type argument by extension from O’Brien et al?

    The case just demonstrates (so far) how land law has become so in hock to mortgagees that it bends its back to protect them (not a comment on the judge, whose judgment is a proper land lawyer’s approach, but on the structure of land law).

  2. I thought the real difficulty – putting Cann and Redstone to one side – was where the proprietary right came from. Up until the sale the defendants were freehold owners of the land. How could another party grant them a proprietary interest in their own land before the sale?

    If it was immediately after the sale had taken place, it is difficult to distinguish Cann. The sale could not have taken place without the mortgage and so Cann applies does it not?

    I can’t see how the Court of Appeal to say otherwise, so maybe it is one for the Supreme Court to have a look at Cann again 20 years on?

  3. Permission to appeal was granted by HHJ Behrens and public funding has now been granted . Appeal to be lodged by 30/12/10

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