Property – Sale and leaseback – Priority of interests – Mortgagee seeking possession of residential property – Continuing occupiers under sale and leaseback agreements claiming overriding interest — Whether occupiers having interests sufficient to give priority over mortgagees — Whether occupiers having priority under section 29(4) of Land Registration Act 2002 — Preliminary issues determined in favour of claimants
In each of these test cases, the claimant mortgagees sought possession of mortgaged residential property pursuant to the terms of their security. In each case the mortgagor was assumed to be a nominee for NEPB and was the defendant to the relevant proceedings but had not taken part in them. It was not disputed that substantial arrears had accrued under the mortgages and that the first defendant mortgagors had no defence to the claims.
However the first defendants were not in possession of the properties, which were occupied by the former registered proprietors under a sale and leaseback scheme. The occupiers were joined as second defendants to the proceedings and the dispute concerned the priority between the rights of the claimants and the assumed rights of the second defendants.
The court was asked to determine, inter alia, whether: (i)the interests alleged by the second defendants were sufficient to be overriding interests under para 1 or 2 of Schedule 3 to the Land Registration Act 2002; and (ii) any of the tenancy agreements alleged by the defendants had priority over the claimants’ charges under section 29(4) of the 2002 Act.
The second defendants argued that as overriding interests, their interests took priority over those of the claimants, since they arose at the time of the contracts, which were exchanged before completion. Consequently the interests existed immediately before completion. Since the second defendants had been in actual occupation, their interests overrode took priority over those of the claimants. Moreover, there had been a sale and leaseback to the occupiers. The leaseback had resulted from the promises that NEPB had made to the second defendants. In those circumstances the first defendants, as NEPB’s nominees, had no more than a title to the property subject to the second defendants’ equitable rights and that was all that was charged to the claimants.
Held: The preliminary issues were determined in favour of the claimants.
The claimants’ rights under their charges took priority over any equitable rights that the second defendants might have acquired as against NEPB following the representations that NEPB might have made. Although the second defendants’ assumed equitable right to a leaseback was bound up with the sale of their properties to NEPB, the sale was equally bound up with the charge in favour of the claimants that had funded the transaction. A party claiming an equitable interest could not normally obtain priority and there was no reason why a vendor with an equitable right of occupation against a purchaser should be treated differently from any other party with an equitable right: Abbey National Building Society v Cann [1991] 1 AC 56 followed, Hardy v Fowle [2007] EWHC 2423 (Ch) considered, Redstone Mortgages plc v Welch [2009] 3 EGLR 71; [2009] 36 EG 98 disapproved.
The decision in Abbey National applied so as to exclude contractual proprietary rights where the contract, conveyance and charge took place on the same day. It also applied to a vendor that reserved to itself what was assumed to be a proprietary right of occupation in the contract for sale. In each of the instant cases, the contracts for sale had been exchanged on the same day as completion. In such cases, there had been no moment in time between contract and completion to enable an interest to arise. Moreover, prior to completion, the second defendants’ equitable rights were at best personal and not proprietary. At that stage, the second defendants were in possession and were entitled to remain in possession by virtue of their ownership of the properties. NEPB had not been entitled to possession prior to completion and could not therefore grant a proprietary right to possession. Since the rights were personal, they could not give rise to overriding interests. They became proprietary rights as against NEPB on completion: Nationwide Anglia Building Society v Ahmed (1995) 70 P&CR 381 applied.
Under section 63 of the Law of Property Act 1925, the transfers executed by the second defendants would have transferred any interest that they might have had in their property. The contracts or the transfers did not limit the estates transferred; both referred to transferring with full title guarantee. A fresh proprietary estoppel would arise on completion so that there would be no question of NEPB avoiding the equitable interests. The effect of section 63 was simply that the second defendants could not rely on any pre-completion equitable interest.
With regard to priority under section 29(4) of the 2002 Act, prior to registration, the first defendants had only an equitable estate. Thus, any lease granted prior to registration could take effect only in equity. Only a legal lease had been granted that the purchaser acquired a legal estate on registration. Thus, it was on that date when section 29 had effect in respect of leases granted by the purchaser. Alternatively, section 29(4) applied to the grant of a leasehold interest out of a registered estate. Prior to the registration of the purchaser, the grant of the leasehold interest was not made out of a registered estate and thus did not come within section 29(4).
Clifford Payton, James Shirley, Nicole Sandells and Daniel Gatty (instructed by Glenisters, Cobbetts LLP, of Leeds, and Eversheds, of Cardiff) appeared for the claimants; the first defendants did not appear and were not represented; Jonathan Small QC, James Stark and Phillip Barber (instructed by David Gray Solicitors, of Newcastle upon Tyne and Clark Willis, of Darlington) appeared for the second defendants.
Eileen O’Grady, barrister
