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Equity Release Schemes: the CA view

By Dave

Cook v The Mortgage Business PLC et al [2012] EWCA Civ 17

[note for law students: this is a really important case on land registration in which the principles in Abbey National BS v Cann are considered and applied.  Please note that we do not write essays for you or respond to queries which assist you in writing your essays – we get quite snippy about such enquiries so beware.  As an academic and property law teacher myself, I get quite irate with those enquiries.  However, if you want to engage with us and our writing, we would be really happy and will respond in kind.]

Every generation seems to have its great property law case – think about Nat Prov v Ainsworth, Williams & Glyns v Boland, City of London v Flegg, Abbey National v Cann, and the machinations of the litigation which led to RBS v Etridge.  This litigation, which was formerly known as In re North East Property Buyers Litigation, is shaping up to be the case of this generation. We noted the judgment of HHJ Behrens in these matters  and were very grateful for a transcript of the judgment (as we are for a transcript of this one, although it now appears on baili as well).  The Court of Appeal gave its judgment on 24.01.2012, dismissing the appeal from HHJ Behrens’ straight-bat judgment. I assume that Jonathan Small, James Stark and Daniel Robinson (counsel for the sellers) are sharpening their keyboards for the SC application – the report I’ve seen doesn’t say whether the CA gave permission to appeal, but I’d assume that it should follow given the importance of the matter both in law and quantitatively (given that FSA regulation of this area was a latecomer).

In essence, the underlying question is whether the House of Lords was correct in Abbey National BS v Cann [1991] 1 AC 56 to hold that there was no moment in time (or scintilla temporis) between the transfer of an estate to a buyer and the simultaneous grant of a mortgage by that buyer to a lender.  The transfer and mortgage are, of course, separate documents and, strictly factually, there is such a moment in time between their execution.  However, in Cann, the House of Lords drew attention to the “reality” of the transactions, that they were indissolubly bound together.  As Lord Oliver put it, “The acquisition of the legal estate is entirely dependent upon the provision of funds which will have been provided before the conveyance can take effect and which are provided only against an agreement that the estate will be charged to secure them”.  The scintilla temporis was, therefore, “no more than a legal artifice”.  It may be something of a heresy to say this, but I have always found Lord Oliver’s judgments (in the HL) turgid beyond belief; whether or not you agree with that comment, it is undeniable that both Flegg and Cann are viewed as being lender-friendly (although lenders would say that those cases make lending both possible and cheaper, thus being borrower-friendly as well).

My own view is that Cann was also flawed and the arguments against it are canvassed in these cases.  The facts of these cases for present purposes, because they are largely assumed, are that a number of owner-occupiers entered into an agreement with the North East Property Buyers Ltd (NEPB).  The terms of the agreement were that the company would buy the property and, on sale, would then rent the property back to the sellers.  NEPB’s agents were not particularly well-versed in either property or landlord and tenant law (that seems to be one constant fact in most of the equity release cases).  They promised different terms to each of the buyers and different rent levels, but many were told they could stay in the property for as long as they liked provided they kept to the terms of the tenancy.  NEPB financed each transaction with a buy-to-let mortgage.  Crucially (as we will see), they did not disclose to the lender that the seller/s would remain in the property or the terms of the tenancy agreement.  Exchange of contracts and completion, including the execution of the charge, took place on the same day.  NEPB became insolvent and vanished.  The lenders want possession.

The overarching question is whether the representations and agreements made between NEPB and the sellers created rights which bound the lenders.  This raises full frontal the question whether Cann is distinguishable on the facts.  It is not about actual occupation (yet, at least), as the sellers were clearly in actual occupation at the date of the sale.

In summary, the Court of Appeal (Etherton LJ giving the judgment, with the MR and Rix LJ agreeing) held that Cann was not distinguishable and, indeed, its policy driver was just as relevant to these cases.  There was a secondary argument about the effect of priority searches, which (rightly) was decided in favour of the lenders.  If you’ll forgive me, I will let you read that part of the judgment ([57]-[64]) for yourself if you’re interested.  It seemed to me to be axiomatic.  As a result of those findings of law, possession was ordered as there were no other issues left to be decided.

The argument on which the barristers sharply divided was whether, after exchange of contracts and before completion, there was sufficient equity in NEPB to grant the sort of estoppel/constructive trust/rectification type of interest which the sellers claimed.  HHJ Behrens had held that the sellers’ rights at that stage were purely personal.  Detailed arguments were provided to the CA on these points, but, although attracted by the lenders’ arguments,  Etherton LJ sidestepped them by saying they were too technical (although he was attracted by the lenders’ submissions on the point).  As he put it, the question was whether the commercial and legal nature of the transaction was that there was a sale subject to a reservation or two separate transactions (a sale of the freehold and a separate leaseback on completion).  And “the way the documentation was prepared points firmly in favour of the latter” ([34]).  None of the sale contracts referred to the leaseback arrangement – indeed, they were all sold with vacant possession:

The clear impression created by the contracts, therefore, was that the vendors would be selling without reserving any beneficial interests or other rights in the property. That was how any third party, including mortgagees lending money to fund the purchase, would be entitled to view the matter: comp. Abigail v Lapin [1934] AC 491. The contracts disclosed no basis for a qualified report on title to the respondent lenders by their solicitors which would have alerted the respondent lenders to the possibility that the appellant vendors expected to remain in possession after completion or that the purchasers would obtain anything less than the entire legal and beneficial interest in the properties. ([35])

He went on to say, though, that, even if an equity had arisen in favour of the sellers at that point, the Cann principle applied so that the lenders’ interest.  [I’m not entirely sure I agree with that approach because of the pure priority principle, first in time prevails,but it’s neither here nor there at the moment].  The question put to the CA was whether the policy underlying Cann was still relevant and relevant to these particular transactions.  In a nutshell, the sellers argued that “… unlike Cann, where the ‘driver’ of the transaction was to find a new home, the driver in the present cases, without which they could not and would not have proceeded, was the leaseback to the vendor” ([50]), that these cases involved different social and economic factors in which the need/desire of people (of modest means, advancing age as well as limited legal knowledge and experience) to stay in their homes was the uppermost consideration ([51]).  Further, and this is clearly crucial, the lender is in a better position to take the risk of fraud and carelessness in such schemes and should make appropriate enquiries.

Etherton LJ disagreed.  Daisy Cann was in no less an unfortunate position to the sellers here ([55]); in substance and reality, the driver for the sale was the sellers’ need/desire to sell their properties to discharge their mortgage and get some cash, and there was no reason for them to suppose that NEPB would not obtain a mortgage (this seems to me to be an advance on the Henning principle); and finally it was not for the lenders to make direct enquiry of the sellers, which may be inappropriate, but to ensure that the contract of sale contained all the details of the transaction ([54]-[56]).

My suspicion is that the sellers were obviously constrained by precedent but ultimately want to argue (rightly) that Cann was wrongly decided.  The stage is now set for that argument, assuming PTA is granted.

Finally, Etherton LJ concluded with sharp words on the conveyancing practices highlighted in these cases, and there is a clear suggestion that the proper course of action for the sellers is to pursue their conveyancers for not including the terms of the agreement in the contract of sale itself:

I do not know why details of those contractual arrangements were not contained in the contracts for sale, but, if the arrangements were intended to be binding on any third party as well as the purchaser – a matter the appellant vendors’ solicitors would have been bound to investigate and advise upon – their omission seems on the face of it plainly inconsistent with proper conveyancing practice. ([67])

Conveyancing solicitors beware!


  1. JS

    PTA has been refused by the CA but that is not a surprise.

  2. S

    I do hope the appellants get some joy from suing their conveyancers. I do have my doubts though.

    The rational (and policy) for this decision is plainly that while mortgage companies might be financially more able to take the hit from this fraud, it would be unfair on them as they don’t appear to have done anything wrong and the real blame lies with the appellant’s conveyancers (it is clear that this is why Etherton brushes aside all the legal arguments and says his primary reason no equitable interest was created was because decides that the real reason no equitable interest was created was because the solicitors didn’t say it should in the contract of sale).

    However, I have a horrible feeling (without actually knowing) that the conveyancers were probably not told either as I bet the sales were also handled by NEPB. It does seem odd that any competent solicitor would have said a property was being sold with vacant possession when it clearly wasn’t. The inference is that they had no idea of the true arragement either.

  3. JS

    An application for public funding to seek PTA has been made.

  4. JS

    Public funding has been granted to seek permission to appeal from the Supreme Court

  5. dave

    Congrats, JS – fingers crossed for the pta. I will definitely be there for the argument if you get it. Let me know if I can do anything to help (assuming you know who I am).

  6. JS

    Thanks. – appeal not expected to be listed till June 2013 at earliest.

  7. JS

    Listing delayed now looking at between Oct 2013 and May 2014 – so keep your copies of Kingcastle-v-Owen-Owen to hand !

    • chief

      It appears to have been listed for 3rd-5th March, with a bench of Hale, Wilson, Sumption, Reed & Collins.

  8. JS

    Yes listed for 3-5 March 2014 . Mortgage Express and Mortgage Business are intervening .

  9. Houseless

    Well their lordships have sadly come to their expected conclusion.What I find strange is that there appears to have never been any scrutiny of the lenders enquiries into their mortgage applicants backgrounds.

    • Giles Peaker

      That is routinely handed off to the solicitors in mortgage lending. And the solicitors in these cases were at best negligent, at worst fraudulent. They also no longer exist.

      • Houseless

        I mean after the lenders sought to disavow themselves of the agreement

        I appreciate that the vendors sols have erred in the first place but I am puzzled as to why the lenders own failures in granting the mortgage in the first place have not been taken into account


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