In the current economic climate, some borrowers have been tempted to enter into sale-and-leaseback transactions so that they can remain in their properties. What, though, is the position where the new owner has acquired the property with help from a lender? Which of the interests granted by the new owner takes priority – the mortgage or the lease?
In each of the test cases in Re North East Property Buyers Litigation [2010] EWHC 2991 (Ch); [2010] PLSCS 299, the High Court was asked to decide whether the rights of the tenants took priority over the interests of the buyers’ lenders. The tenants pinned their hopes on the county court decision in Redstone Mortgages plc v Welch [2009] 36 EG 98 (in which the judge agreed that that the tenants had an overriding interest in the property because they were in actual occupation at all times), but the judge upheld the lenders’ claims.
The judge ruled that the sellers were in possession before completion because they owned their properties. As a result, their rights were at best personal and did not become proprietary until the properties were sold. Importantly, however, when a buyer relies on a lender to fund completion of a purchase, the transactions involved comprise one indivisible transaction. In other words, a buyer who depends on a mortgage does not acquire anything other than an equity of redemption. Consequently, there was no scintilla of time in which the sellers’ new proprietary right to occupy could have vested ahead of the legal charges in favour of the lenders.
The judiciary appears to be divided on this issue: see, for example, the decisions in Redstone and Chen v Delaney [2010] EWHC 6 (Ch); [2010] 12 EG 101. The school of thought adopted in these cases is that sales and leasebacks are so indissolubly bound together that the buyer only ever acquires a freehold reversion. However, there cannot in law be a dead heat between two mutually inconsistent and competing interests over a legal estate, and the judge took the view that a decision in the tenants’ favour would add significantly to the burdens on lenders when investigating title to properties offered to them as security.
The judge went on to distinguish another line of reasoning in Redstone. The tenants argued that their leases, which were too short to require perfection by registration, took effect in law immediately and, as a result of section 29(4) of the Land Registration Act 2002, took precedence over the lenders’ mortgages, which had not been registered until after the grant of the leases. The judge disagreed on the ground that section 29(4) takes effect when a buyer acquires a legal estate on registration.
How then, in sale-and-leaseback transactions, can a seller ensure that its new lease will obtain priority over a contemporaneous mortgage created by the buyer? The answer – unless and until this decision is reversed – would seem to be to include a special condition in the sale contract requiring the buyer to procure that its mortgagee cedes priority to the seller or provides a consent to the grant of the lease on completion of the transaction.
Allyson Colby is a property law consultant
