Case Comment: Mrs Scott v Southern Pacific Mortgages Limited  UKSC 52
04 Thursday Dec 2014
Home owners, like Mrs Scott (the Appellant), were persuaded to sell their houses at discounted prices to buyers who promised the home owners the right to remain in the house “for as long as they liked” as tenants after the sale. The home owners were usually in financial difficulties and the buyers were companies that financed the purchase through secured borrowing. When the buyers defaulted on the mortgage payments the former owners found they were being evicted following possession proceedings by the lenders.
- Mrs Scott was the freehold owner of a house situated in Newcastle-upon-Tyne. In 2005 Mrs Scott fell into financial difficulties and put her house on the market for £156,000.
- She was approached shortly afterwards by an agent for North East Property Buyers (“NEPB“), who told her that NEPB was willing to purchase her house for £135,000, that she could remain in occupation as a tenant at a discounted rent of £250 a month and, if she stayed for 10 years, she would receive a “loyalty payment” of £15,000. The agent even arranged a solicitor to “represent” her at NEPB’s cost.
- NEPB took out a “buy to let” mortgage to fund the purchase of the house and the lender was not told of the promise made to Mrs Scott. The mortgage application form stated that the house was being purchased on a “buy to let” basis, with vacant possession and that all tenancies granted would be for 6 months or less.
- The transfer of the house from Mrs Scott to NEPB and the legal charge from NEPB to the lender, Southern Pacific Mortgages Limited (“SPML”), took place on 12 August 2005. On 16 August 2005 NEPB granted a two year tenancy to Mrs Scott (which was to continue as a monthly tenancy thereafter unless terminated in writing) at the reduced rent. Mrs Scott also received a document promising her that her “loyalty payment” of £15,000 would be paid after 10 years. On 16 September 2005 the transfer and the charge were registered.
- In 2009 Mrs Scott discovered that a possession order had been made in respect of the property after NEPB had defaulted on its mortgage and that she was to be evicted.
The High Court held in an earlier test case that the lender’s rights of possession under the charge had priority over the “interest” of the occupier. The Court of Appeal upheld that decision.
Case before the Supreme Court
Mrs Scott argued that she had an equitable proprietary right in the house from the moment of exchange of contracts with NEPB, which amounted to an unregistered “overriding” interest that was given priority over the lender’s charge by virtue of her occupation pursuant to section 29(2)(a)(ii) of Schedule 3 and paragraph 2 of Schedule 3 to the Land Registration Act 2002 (the “2002 Act“).
This class of interests relates to occupiers’ interests in land at the time of the disposition (in this case the disposition was the grant of a charge to SPML). Mrs Scott claimed that her interest, as an occupier of the house before the charge was made, had priority over SPML’s interest and was therefore “overriding”.
The courts below both decided that Mrs Scott did not have an equitable interest in the property. The two main questions in deciding whose interest had priority, and the questions to be considered by the Supreme Court, were:
- whether NEPB had been in a position, at the exchange of contracts, to confer equitable proprietary rights on Mrs Scott, as opposed to personal rights only; and
- if equitable rights were conferred, whether the decision of the House of Lords in Abbey National Building Society v Cann  is to be applied. Cann decided that where a purchaser relies on a loan for the completion of a purchase, the transfer of the property and the grant of the charge are one indivisible transaction with no gap in between the two. The effect of this was that the occupier could not assert an equitable interest which arose on completion of the sale of the house against the lender.
The Supreme Court’s decision
The Supreme Court unanimously dismissed the appeal and held that NEPB could not confer equitable proprietary rights on Mrs Scott at any time before completion of the purchase.
In the Court’s view, Mrs Scott acquired only personal rights against NEPB despite having agreed to sell her property on the basis of a promise that she would be entitled to remain in occupation “for as long as she liked”. Such personal rights could only become proprietary (and capable of taking priority over the mortgage) when they were “perfected” by the completion of the purchase. However, the effect of Cann was that the purchase and the grant of the charge to SPML formed one indivisible transaction. Therefore, there was no point in time when NEPB owned the Property free from the mortgage, which, in turn, meant that there was no point in time when it was capable of granting a proprietary right to Mrs Scott. SPML’s interest therefore prevailed.
As a result of the finding against the first question, the Supreme Court did not need to decide the second question. However, the justices did discuss it, with a notable point arising in that Lord Collins and Lord Sumption agreed that the contract, as well as the conveyance and the mortgage, were all part of the same transaction, whilst Lady Hale, Lord Wilson and Lord Reed disagreed that the contract was part of the indivisible transaction.
To contextualise the public policy aspects of this litigation, one of the principal objectives of the 2002 Act was to create a simplified electronic conveyancing system under which it would be possible to investigate title to land almost entirely online. Overriding interests, by contrast, related to unregistered rights that were normally not included in title deeds and, in general, were an impediment to one of the main objectives of land registration: that the land should be as complete a record of title as it could be. Nevertheless, the law recognises that some rights can be created informally and that to require their registration would be to defeat the policy that underlies their recognition. Overriding interests are justified as serving a legal and social need that must, in some cases, where applicable, usurp the “absolute certainty” of registered title.
It is difficult not to feel sympathy for Mrs Scott and other former home owners in her position. Not only were they swindled into selling their homes at undervalued prices but, in most cases, were also victims of dishonesty by solicitors appointed to represent them. To exacerbate their plight, they found that the law was not on their side either. However, it is critical to weigh this against public policy considerations regarding registered transactions: there are presently more than 23,000,000 registered titles in England and Wales and each month the Land Registry deals with up to 75,000 house sales (the majority of which are financed through secured loans).
In the closing speeches, Lord Collins echoed those sentiments and even expressed “the hope that the lenders will, before finally enforcing their security, consider whether they are able to mitigate any hardship which may be caused to the vendors”. However, the bottom line is that, in this case, the law does not allow sentimentality to get in its way.
Given the peculiar facts in these cases, several questions remain unanswered. For example, the Supreme Court did not need to decide the second question regarding indivisibility. Nevertheless, it discussed at length the question of indivisibility in a property purchase/bank loan context, as noted above. Further discussion is beyond the scope of this article, however, suffice it to say, the door remains ajar as to what the effect of Cann would be had (under a different set of facts) an equitable right been conferred on an occupier on exchange of contracts. Another point, that was not explored, was the extent to which the lender’s interest would have been affected if it had knowledge of the promise made to the occupier.
These “sale and rent back” schemes operated during a period when sale and rent back transactions were common yet unregulated. Since then, and as a likely result of these schemes, “sale and rent back” transactions have become a regulated activity under section 19 of the Financial Services and Markets Act 2000 and are now a rarity.
Swindling buyers and crooked agents aside, it should not be forgotten that another culprit in this unfortunate sequence of events are the solicitors who act for the sellers. One of the chief culprits, a solicitor who appeared in the majority of these transactions (and incidentally died of stab wounds in 2013 in somewhat mysterious circumstances), through his actions relayed a fundamental point that should always be borne in mind: chose your own solicitor and always obtain independent legal advice. When the stakes are higher, this is all the more paramount. The decision of the Supreme Court in this test case is nevertheless of great significance to the plethora of other cases awaiting this decision. Whilst this spells bad news for those former home owners, and raises philosophical questions as to the “harshness” of the law, ultimately the principles of certainty and registration espoused by the 2002 Act prevailed.
One of the principal axioms of UK property law is “caveat emptor” – buyer beware. Regrettably, in this instance, and through no fault of their own, the reverse applied in the North East Property Buyers’ Litigation.