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Suspending belief

By Dave

We have dealt with the basic facts in Scott v Southern Pacific Mortgages Ltd [2014] UKSC 52 when considering its previous incarnations (Cooke v Mortgage Business [2012] EWCA Civ 17 and Re North East Property Buyers Ltd [2010] EWHC 2991 (Ch)).  In summary, the basic question for the Supreme Court was this: where a seller has agreed, prior to the contract of sale, that the buyer will grant the seller a tenancy after the sale, does the seller have that right so as not only to bind the buyer but also the buyer’s lender?  I think, when framed as a question like that, the answer seems obvious.  Call me a weak-kneed liberal, but all the equity (colloquially speaking) is in favour of the seller.  They have entered in to the transaction on that basis and would not have entered in to the transaction otherwise.  We all make bad deals which the law doesn’t get us out of, but the equity isn’t really in our favour: why should the law get us out of a bad deal?

That the seller – Ms Cooke – lost therefore requires careful explanation and the suspension of belief (at least imho).  I have previously described this case as being the land law case of this generation and I stick by that description.  It will undoubtedly be in every land law examination paper for the next 10 years, just like BolandFlegg and Abbey National BS v Cann.  In fact, one of the questions for the Supreme Court was whether Cann was distinguishable from Cooke. By a majority, the Supreme Court held that it was, partly because it refused to suspend belief that far.

However, Ms Cooke lost on the crucial first question.  Her argument was that her rights took effect at exchange of contracts.  Her rights were either by way of proprietary estoppel or constructive trust.  However, the buyer could only give effect to those rights if the buyer herself had relevant rights to give.  The only relevant rights in which we are interested are equitable proprietary rights, because only these are capable of overriding the interest of the lender (schedule 3, para 2, Land Registration Act 2002; no different in this respect, it is held in Cooke, from s 70(1)(g), Land Registration Act 1925).  So, the logical first question is whether the buyer could grant such rights after exchange of contracts.  Now, I remember many moons ago recognising and reading up on this question.  I was aware that it was a question (there is a rather good paper in Current Legal Problems back in the early 1970s) and the logic that the buyer took a proprietary interest was circular (they only got that interest because of their right to specific performance which was based on, um, that interest); but, like most, I lapsed back in to the standard response that the buyer takes an equitable interest because of their right to specific performance of the contract, following Lysaght v Edwards (1876) 2 Ch D 499.

I knew that was lazy but generations of law students that I taught either didn’t know or weren’t bovvered.  Future generations, however, will be.  For we have, for the first time, a really authoritative response to this question and it is not wholly palatable.  The Supreme Court all agreed that the buyer can only grant personal rights at exchange of contracts.  They did so, in part, based on a broad (and, I must say, charitable) reading of Cann and on a construction of the Land Registration Act 2002 which impelled the conclusion that an interest could only be granted by a person who holds an estate, and an estate implies a legal estate.

The really controversial point – and the one on which the Justices were split (3-2) – was the largely irrelevant question as to whether the facts were distinguishable from Cann.  It was irrelevant because there was no interest created in Ms Scott’s favour prior to completion – it is important, and rather unfortunate (in my view) that the Claimant did not argue that Cann was wrongly decided, but that it was distinguishable in a case such as this where the interest was claimed to be created on exchange.  One can split hairs over whether this was obiter but the issue was fully argued and the lines of argument clear.

This resolved down to the question whether the fiction that there is no moment in time between the grant of the mortgage and the transfer of the land by seller to buyer (no “scintilla temporis”) could be extended also to exchange of contracts.  One might say that the Justices were split as to “reality”.  For Lords Collins and Sumption, the reality was that the whole transaction was indivisible, and this could be shown by an analysis of the Law Society’s standard conveyancing practice.  Although in this transaction (as in Ahmed, which is differently and much analysed in this case but, I must admit, came off our student reading list ages ago) contract, conveyance and mortgage happened on the same day, the analysis was not dependent on that.

The alternative reality – which I must say is a reminder of part of the mortgage clogs and fetters jurisprudence – was provided by Baroness Hale, with whom Lords Wilson and Reid agreed.  The analysis was that the reality is that seller and buyer have different interests in the transaction and the same solicitor cannot act for them both.  The lender’s and buyer’s solicitor may be the same (and usually are, of course).  But the mortgagee is not a party to the sale transaction and may not “necessarily know the precise terms of the contract of sale”; nor will the seller necessarily know that the buyer will be getting a mortgage, nor the precise terms of the mortgage.  Thus, they are divisible transactions.  Now that is a sensible analysis but, I have to say, logically it surely runs counter to the indivisibility of the completion element of the transaction in Cann terms.  Baroness Hale, at [120], says:

I understand, of course, that the ratio of Cann is limited to those cases where the purchaser requires the loan in order to complete his purchase. In that sense, the contract of sale is a necessary pre-cursor to the conveyance and mortgage. But that does not explain why they are indivisible, nor does it explain what is meant by indivisibility in this context. If what is meant is that the purchaser only ever acquires an equity of redemption, out of which she is not able at completion to carve proprietary interests which are inconsistent with the terms of the mortgage, then to talk of the indivisibility of the contract adds nothing to the Cann analysis. It is still necessary to decide whether the purchaser can confer proprietary rights before completion. If what is meant is that the purchaser cannot do so, then it adds nothing to the analysis of the first question rehearsed earlier. The risk is that to talk of an indivisible transaction will not only fly in the face of the facts but also create confusion.  Will it be taken, for example, to prevent a vendor from creating overriding interests between contract and conveyance?

My suspicion is that this will come back to bite at some point in the future.

1 Comment

  1. JS

    I am always very reluctant to comment on one of my own cases as it can either sound like being rather pleased with yourself or sour grapes depending on how the case went .

    I agree entirely that there are grounds for arguing that Cann was wrongly decided and an overreaction in particular to the Boland panic that was not evidence based . We took the view that it was not properly open to us to challenge Cann in the Supreme Court as the Land Registration Act 2002 was so clearly modelled on it and on the clear acceptance in the Law Commision paper that preceded it that it was right .

    Perhaps Baroness Hale’s hope that the fresh Law Commission investigation will ameliorate matters in the future for the victims of a combination of fraud and lender carelessness but we shall see .

    On the contract point – the SC did not address despite the point being made the now evident inconsistency between registered and unregistered land as Section 2(4) Land Charges Act 1972 is clearly drafted on the basis that an estate contract entered into by a person who is entitled to have the legal estate conveyed to him can be registered as a binding Class C(iv) land charge – yet Scott makes that impossible in registered land so it seems to be proprietary for one purpose and not another .



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