Scott v Southern Pacific Mortgages [2014] UKSC 52

The Supreme Court has dismissed the appeals in the case of Scott v Southern Pacific Mortgages Ltd [2014] UKSC 52, in which I appeared with Lesley Anderson QC (opposing the appeal) for the Interveners, The Mortgage Business plc.

Scott is the final instalment of the North East Property Buyers Litigation, a group of test cases concerning sale and rent back transactions. In sale and rent back transactions an owner-occupier sells their house to an investor who then rents it back to them. The issue in the test cases was whether a bank which lent money to fund such a purchase, not knowing that the former owner would continue in residence as a tenant, was bound by interests arising under proprietary estoppel or constructive trusts from promises made before the purchase by the purchaser to the vendor. 

In nine test cases arising out of sale and rent back purchases made by a firm named North East Property Buyers, the High Court held that mortgagee banks were not bound by any interests in the properties arising from such promises [see Re North East Property Buyers Litigation [2010] EWHC 2991 (Ch)]. The occupiers in four of the test cases appealed to the Court of Appeal which dismissed their appeals [see Cook v The Mortgage Business plc, sub nom The Mortgage Business plc v O’Shaughnessy [2012] EWCA Civ 17, [2012] 1 WLR 1521]. The occupiers were granted permission to appeal by the Supreme Court but by the time of the hearing in March this year, only one of the appeals was still live, the case of Scott v Southern Pacific Mortgages Ltd. The Mortgage Business plc and Mortgage Express were both represented in the Supreme Court because of their interests in other such transactions.

The difficulty facing the occupiers was that the House of Lords had held in Abbey National v Cann that where a property is purchased with the aid of a mortgage, the purchase and the mortgage are indivisible and complete simultaneously; the purchaser only obtains an equity of redemption in the property and so cannot create rights binding on his lender which are not permitted by his mortgage. The lenders’ case was that any interest in the properties that sale and rent back occupiers obtained arising from the purchasers’ promises must have been purely personal until after completion of the mortgages, by when it was too late for the occupiers’ interests to obtain priority over the mortgages.

Mrs Scott’s main argument before the Supreme Court was that she had obtained a proprietary interest in the property arising out of the purchaser’s alleged promises as soon as contracts for sale were exchanged, and hence before completion of the mortgage that funded the purchase. Because she had been living in the property throughout, she claimed that this interest was an overriding one which bound the lender. She contended that between exchange of contracts and completion the purchaser had an interest in the property out of which her proprietary interest could be carved.

In interesting judgments addressing fundamental land law issues, the Justices unanimously accepted the lenders’ argument that promises made by a sale and rent back purchaser could not give rise to proprietary interests in the property being sold until after completion of the purchase. Lord Collins gave the leading judgment. He held that between exchange of contracts and completion a purchaser cannot confer proprietary interests in the property he is purchasing on third parties (or the vendor in a different capacity).  When the purchaser acquires the legal estate, an estoppel is fed and previously personal interests become proprietary, but by then it is too late for the interests to bind the lender who funded the purchase. 

The outcome of the appeal has been eagerly awaited, especially by mortgage lenders, many of which will have lent on what turned out to be sale and rent back transactions, and by those acting for individuals in comparable positions to the unfortunate Mrs Scott.  

The decision of the Supreme Court will have consequences in other contexts than residential sale and rent back transactions, of which there have been few since regulation of that market was introduced. Commercial sale and leasebacks may be affected as may be claims to overriding interests in other contexts. And careful thought will have to be given as to how to protect the interests of sub-purchasers of property in the light of the conclusion that a purchaser cannot create proprietary interests in the property he is buying between exchange and completion. Until now, sub-purchasers have been able to apply for notices on the register to protect their interests in the property being purchased. Do they have a sufficient interest in the property to register a notice in the light of Scott?  There may also, of course, be professional indemnity implications where solicitors have acted for vendors in sale and rent back transactions and not given proper advice.