Analysis
The appeal arose from one of what were originally ten test cases in which the defendant home owners (the vendors) were persuaded to sell their properties to purchasers (the purchasers) who promised the vendors the right to remain in their homes after the sale. The purchasers bought the homes with the assistance of mortgages from lenders (the lenders), who were not given notice of the promises to the vendors. Neither the rights of occupation promised by the purchasers to the vendors nor the tenancies granted by the purchasers were permitted by the lenders’ mortgage. Exchange of contracts between the relevant vendor and purchaser, completion of the contract by the execution of the transfer and the execution of the mortgage all took place on the same day. The purchasers defaulted on the loans and the lenders sought possession of the homes. This was resisted unsuccessfully by the vendors at first instance and on appeal to the Court of Appeal. The vendors appealed to the Supreme Court.
The essence of the appeal was whether the vendors had interests whose priority was protected by virtue of s29(2)(a)(ii) of and para 2 of Sch 3 to the Land Registration Act 2002 (the 2002 Act).
Two questions arose on appeal. First, whether the purchasers were in a position at the date of exchange of contracts to confer equitable proprietary rights on the vendors as opposed to personal rights only. Secondly, if the first question was in the affirmative, whether the decision of the House of Lords in Abbey National v Cann [1991] (that where a purchaser relies on a bank or building society loan for the completion of a purchase, the transactions of acquiring the legal estate and granting the charge are an indivisible transaction and an occupier cannot assert against the mortgagee an equitable interest arising only on completion) extended to include such a case where the equitable interest is said to arise at the time of exchange of contracts rather than on completion.
With regards the first question, the lenders argued that the vendors’ claims against the purchasers were purely personal, not proprietary, until the purchasers obtained the legal estate on completion and the estoppel was then ‘fed’. On the basis of Cann this would have been too late to give the vendors priority over the lenders’ charges. The vendors relied upon s116 of the 2002 Act as providing that their proprietary estoppel claims gave them proprietary rights and that it was not necessary that the person who was estopped had a legal title. Further, they relied on the long line of authority that following exchange of contracts the seller holds the property on trust for the purchaser and therefore that a person who has contracted to purchase has a proprietary interest and therefore, on exchange, the vendors became trustees for the purchasers and therefore the purchasers were able to confer on the vendors equitable interests in the properties carved out of their rights as purchasers. Further the vendors asserted that they did not sell their homes outright to the purchasers but simply sold them subject to the rights to the leases which they had been promised and that Cann should be distinguished on the basis that in a sale and leaseback transaction the purchaser in reality has no more than a reversionary interest subject to that leaseback.
With regards the second question, the lenders asserted that, even if an equitable interest arose on exchange of contracts, Cann had already decided that not only were the conveyance and the charge part of one indivisible transaction, but that the contract, conveyance and charge were indivisible and therefore such an equitable interest would not take priority over the lenders’ charges. The vendors argued that Cann did not decide whether the indivisible transaction analysis applied where the equitable interest of the occupier arose on exchange of contracts and further that the analysis did not apply to such a situation.
Held, dismissing the appeal:
- 1) Unregistered interests which override registered dispositions under para 2 of Sch 3 to the 2002 Act by virtue of s29(2) of the 2002 Act must be proprietary in nature. A purchaser of land cannot create a proprietary interest in the land, which is capable of being an overriding interest, until his contract has been completed. When the vendors agreed to sell their properties on the basis of the purchasers’ promises that they would be entitled to remain in occupation, the vendors acquired no more than personal rights against the purchasers. Those rights would only become proprietary and capable of taking priority over a mortgage when they were fed by the purchasers’ acquisition of the legal estate on completion. At this point, Cann would apply, with the effect that the acquisition of the legal estate and the grant of the charge would be one indivisible transaction, and the vendors would not be able to assert against the lenders their interests arising only on completion.
- 2) As regards the vendors’ arguments, the combined effects of s116 and 132 of the 2002 Act were that s116 rights require a proprietary element to have any effect. Further, there was no analogy in the present case with the vendor’s lien which arises by operation of law and is the corollary of the purchaser’s equitable interest in the property.
- 3) The first question having been answered in the negative, the second question did not arise for decision nor was it likely to ever arise.
- 4) (Obiter dictum – Lord Collins, with whom Lord Sumption agreed) On the second question, it was implicit in Cann that contract, conveyance and mortgage are indivisible. It would be wholly unrealistic to treat the contract as a divisible element in the process for the present purposes. Accordingly, even if (contrary to the court’s view) the vendors had had equitable rights of a proprietary nature against the purchasers arising on exchange of contracts, the mortgages would have taken priority.
5) (Obiter dictum – Lady Hale, with whom Lords Wilson and Reed agreed) On the second question, it was not implicit in Cann that the contract for sale was part of the indivisible transaction and therefore it was not implicit that even if (contrary to the court’s view) the vendors had had equitable rights of a proprietary nature against the purchasers arising on exchange of contracts, the mortgages would have taken priority.
JUDGMENT LORD COLLINS (with whom Lord Sumption agrees) [1] The transactions with which this appeal is concerned arose during a period when sale and rent back transactions were common. They were what was described by the Office of Fair Trading in 2008 (Sale and rent back: An OFT market study) as a relatively new type …Continue reading "Scott v Southern Pacific Mortgages Limited & ors [2014] UKSC 52"