Struggling homeowners who seized on sale-and-leaseback agreements as a means of escaping from debt, while continuing to occupy their homes, were not always aware of the potential drawbacks of such schemes. Many sold their properties at a discount and, having entered into the transaction in good faith in return for the right to stay on as tenants, found themselves facing possession proceedings because their landlords had failed to keep up with mortgage payments to their lenders.
The key question in Scott v Southern Pacific Mortgages Ltd [2014] UKSC 52; [2014] PLSCS 288 was whether the mortgages created by the sale-and-leaseback buyers took priority over the agreements made between the buyers and sellers. The buyers’ lenders were not told that the sellers had been given to understand that they would be able to stay in their homes for years; they were simply informed that the sellers were providing vacant possession. To make matters worse, the contracts for sale to the buyers made no reference to the leases promised to the sellers and the tenancies were on terms that were not permitted by the lenders’ mortgages.
Ultimately, the litigation boiled down to one question. Which of the two innocent parties should lose out: the sellers or the sale-and-leaseback lenders? The sellers claimed to have overriding interests in the properties, which took precedence over the lenders’ mortgages. They argued that they had acquired equitable rights in the properties on exchanging contracts with the buyers on the basis of their promises and that their rights constituted overriding interests because they were in actual occupation when the sales were completed.
The Supreme Court was sympathetic, but agreed unanimously that the buyers had not been in a position to confer equitable proprietary rights on the sellers on exchange of contracts. It cited Tasker v Small (1837) 3 My&C 63, 70, where the court said that the rule under which a purchaser becomes in equity the owner of the property sold “applies only as between the parties to the contract and cannot be extended so as to affect the interests of others”.
So the sellers’ claims against the buyers were purely personal until the buyers completed their purchases and obtained the legal estate, at which point it was too late for the sellers to secure priority over the lenders’ charges. This was because Abbey National Building Society v Cann [1991] 1 AC 56 put paid to the notion that the acquisition of land is an essential preliminary to a mortgage and that there is a scintilla in time between completion of a transfer and a new charge.
Cann established that, when a buyer relies on a lender to fund a purchase, the purchase and mortgage constitute an indivisible transaction because, without the loan, the property would not change hands. The court also rejected the sellers’ argument that Cann should be distinguished because they did not sell their homes outright and simply sold them subject to the rights to the leases that they had been promised. These were sale-and-leaseback transactions – so the lenders came up trumps.
It seems, therefore, that buyers do not have proprietary rights for all purposes and cannot grant rights that will bind third parties until they complete their purchases. The decision has important implications – not just for sale-and-leaseback transactions, but for other property transactions as well.
Allyson Colby is a property law consultant
