In the current economic climate, some borrowers have been tempted to enter into mortgage rescue schemes (a sale-and-leaseback transaction) to remain in their properties. Unfortunately, some mortgage rescue companies pay less than market value for property and many offer assured shorthold tenancy agreements, which provide very little protection from eviction. Rent increases are sometimes unexpectedly high and if the company falls into arrears with its own mortgage the tenant might be evicted by a different lender.
Redstone Mortgages plc v Welch [2009] PLSCS 201 has important implications for parties involved in such schemes. The tenants claimed that the transaction should be set aside because they had been misled about the nature of the arrangement. The county court upheld their claim and ruled that they had an overriding interest in the property, which bound the new lender, because they had been in actual occupation at all times.
The tenants also claimed that their “short assured tenancy” constituted an assured tenancy (which is more secure than an assured shorthold tenancy). The judge also upheld this claim, and ruled that their interest was binding on the new lender despite a prohibition in the mortgage that prevented the sale-and-leaseback company from granting anything other than assured shorthold tenancies. The judge ruled that it was important to look at the substance of the transaction. On the facts of this case, the leaseback agreement formed an indissoluble part of the sale and purchase agreement because the agreement that the former proprietors were to remain in the house as tenants was key to the transaction. Conveyancing technicalities must yield to commercial and practical reality. The tenants had remained in actual occupation and their rights took priority over the new mortgage.
The judge also ruled that the assured tenancy was binding on the new lender because its mortgage was not registered when the tenancy was granted. As a result, the tenancy took priority over the new mortgage. The lender tried to persuade the judge to interpret the Land Registration Act 2002 differently, but the judge ruled that the charge took effect in equity until it was registered. By contrast, the assured tenancy was for a term of less than seven years and did not require registration to perfect it. Consequently, it took legal effect immediately and, as a result of section 29(4) of the 2002 Act, took precedence over the mortgage.
The result is curious. The legislation protects equitable interests of those in actual occupation. In such circumstances, lenders can ask occupiers whether they have any claims on the property before lending, and if occupiers fail to disclose any interest the lender will obtain a clear title. By contrast, if this decision is correct, the protection conferred by section 29(4) on short leases granted in the period between the date of a transfer and its registration appears indefeasible – an outcome that will reinforce concern about the effects of the “registration gap”.
Allyson Colby is a property law consultant