This appeal concerned nine test cases involving purchase and leaseback schemes whereby owners of properties (“the Vendors”) had sold their homes to purchasers (“the Purchasers”), who had promised that they would have the right to remain in their property after the sale. Typically the purchase price was less than the market value to reflect such a promise. The Purchasers borrowed funds to purchase these properties and then subsequently defaulted on the loan. The lenders claimed possession of these properties.
The main issue was whether the Vendors could claim that they had a right of occupation which was an overriding interest within paragraph 2 of Schedule 3 to the Land Registration Act 2002 (“the Act”) binding on the lenders by virtue of s29(2)(a)(ii)? The following issues were considered:
- First of all the Court of Appeal considered the transaction generally. The correct approach was that there were two transactions, one for the sale of the freehold and one for the leaseback to the Vendors upon completion. No reference was made in any of the contracts for sale to the grant of a leaseback to the Vendors. The clear impression created by the contracts was that the Vendors would be selling without reserving any beneficial interest or other rights in the property. There was nothing to alert the lenders to the possibility that the 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.
- Reference was made to the House of Lords case of Abbey National Building Society v Cann. Mrs Cann had contributed to the purchase price of a property from money she received on the sale of her previous property. She was given an assurance by her son that she would always have a roof over her head. She claimed that she had an equitable interest in the property by virtue of her actual occupation. The House of Lords held that to acquire an overriding interest against a lender by virtue of occupation, the person claiming the interest had to have been in actual occupation at the time of the creation of the legal charge. Where a purchaser relied on a bank or building society loan to complete his purchase, the transaction – that is the transfer of the property and the completion of the mortgage – were one indivisible transaction, and that there was no moment in time (scintilla temporis) during which the property vested free of the mortgage. The House of Lords had held that a purchaser who can only complete the transaction by borrowing money cannot in reality ever be said to have acquired even for a moment of time an interest in land whereby he could grant interests having priority over the mortgage. Accordingly Mrs Cann took subject to the lender’s charge.
- The Vendors sought to distinguish Cann. They asserted that Mrs Cann’s beneficial interest arose from the proceeds of sale of her previous house whereas the Vendors in the present case were already in occupation of the properties. This transaction reflected a change in social and economic conditions created by the fact that people live longer and many have a need to release equity from their property to meet the debts and living expenses to enable them to continue to live in their homes. The driver of this economic activity was the need or desire of people usually of modest means advancing age and limited legal knowledge and experience to stay in possession of their homes. Lenders could easily protect themselves by making direct enquiry of occupying vendors as to what right they thought they would have on or after completion in relation to the property.
- The Court of Appeal decided that it was not possible to distinguish Cann. Mrs Cann gave up occupation of her former home in which she had a beneficial interest. The driver of these transactions was the Vendors’ need or desire to sell the properties. Without such a sale the charges on the Vendor’s properties would not be discharged. There was no reason to suppose that the purchase price would not be funded in the usual way by secured loans. Finally, it would not be appropriate to place on the lenders the risk of carelessness or fraud in the carrying out of the promises or representation made to the Vendors because the lenders could have and should have made direct enquiries to the Vendors. If persons intend to retain any interest in their property after completion they should make that clear in the contractual and associated documents, the inspection of which will form the basis of the report on title. There is, therefore, no point in a lender making direct enquires of a vendor as opposed to the other occupier. It would be difficult to envisage that it would be appropriate or proper for the lender to by-pass the vendor’s solicitors and communicate directly with the vendor.
- The Vendors also argued that between the sale of registered land and the registration of the transfer, the purchaser was by, virtue of the Act, entitled to exercise the owner’s powers in relation to a registered estate including the power to make a lease. A lease of 7 years does not have to be registered. It followed that the Vendor’s rights under a lease for 7 years or less had priority over the lender’s right under a subsequently registered charge even though the charge was executed before the grant of the lease.
- The Court of Appeal held that any leases of 7 years would have expired and therefore it was hard to see its relevance. In any event, prior to registration of the transfer, the grant of any lease takes effect in equity only and does not fall within the Act at all. The Court of Appeal did not accept that a lease of 7 years or less granted by the purchaser pending his registration acquired priority even where the lease is granted and the charge is executed within the priority period conferred by the mortgagee’s official search. Prior to registration the purchaser’s interest in the property can only subsist in equity. As a matter of basic land law, an equitable owner of land cannot grant a legal interest.
Accordingly the appeals were dismissed and the lenders were entitled to the possession orders the right to obtain vacant possession of the properties. The Vendors had not acquired any interest which the lenders were subject to and the lender’s charge took priority. The problem had arisen because the contracts for sale had not given details of the contractual deal. If this had been clearly stated and recorded then it would have alerted the lenders. As the Court of Appeal noted, this omission seems, on the face of it, plainly inconsistent with proper conveyancing practice. The Vendors may now consider whether to make an appeal to the Supreme Court.
Denise Cook v Mortgage Business PLC and other related cases [2012] EWCA Civ 17