Rosemary Scott v Southern Pacific Mortgages Limited & Others (Re: North East Property Buyers)

Supreme Court
22 October 2014
[2014] UKSC 52; [2014] 3 W.L.R. 1163

Handing down judgment on 22 October 2014, the Supreme Court determined the legal and proprietary interests of lenders, purchasers and borrowers surrounding sale-and-rent-back transactions (“SARBs”). The judgment also addresses the much debated question concerning the nature of the interest obtained by the purchaser in conveyancing transactions prior to completion and comments upon the law in relation to overriding interests and proprietary estoppel.

The transaction which made up the appeal to the Supreme Court, a sole remaining test case, was one of a vast number of SARB transactions taking place nationwide (although notably in the north east of England) prior to the regulation of SARB agreements.

A SARB agreement involved (as we now know, following the judgments of the Court of Appeal and the Supreme Court), a sale of the property by the owner (“the vendor-tenant”) followed by a lease-back from the purchaser (“the purchaser-borrower”). The sales, usually at an under value, typically arose from a promise by the purchaser-borrower that the vendor-tenant could reside in the property for life (or some other period) at a below market rate rent, were funded by mortgage lending, and often involved those in financial dire straits. The regulation of the SARB market, and the fall in the property market, has more or less brought an end to this as a means of investment.

The sole test case before the Supreme Court was that of Ms Rosemary Scott (“Ms Scott”). The facts of Ms Scott’s case were, in summary, that she had brought the property from North East Tyneside Borough Council in 1999 with a mortgage from C&G. She subsequently fell into financial difficulties and in 2005 placed the property on the market for £156,000. She was approached by Mr Foster (who was involved with North East Property Buyers (“NEPB”)) and was told that he, or a nominee of NEPB, would purchase the property for £135,000, in exchange for which: (a) she could stay in the property for a discounted rent of £250 pcm (in addition to repayments for residing in the property for various periods of time), and (b) she could live in the property forever and that her son would succeed her.

The nominee for NEPB (Aimee Wilkinson) was granted a Buy-to-let mortgage offer of £114,750 (plus fees) by Southern Pacific Mortgages Limited (“SPML”) on 15 June 2005.

The requisitions on title stated that arrangements would be made directly with the seller “as to both the handover of keys and the time that vacant possession would be given” and  the Contract of Sale, dated 12 August 2005, was expressed to be with full title guarantee and subject to the Standard Conditions of Sale (4th ed.). The special conditions attached at clause four were left by both firms of solicitors without being deleted, so that they read “The property is sold with vacant possession (or) The property is sold subject to the following leases or tenancies.” No leases or tenancies were listed.

Completion of the transfer from Ms Scott to the nominee, and the legal charge granted by Ms Scott to SPML, took place on 12 August 2005, and were registered on 16 September 2005. Ms Scott claimed to have been in actual occupation at the time of completion, but it was not until four days after completion, contrary to the terms of the nominee’s mortgage, that she was granted a fixed term two year tenancy at the reduced rate. At the end of the fixed term, the tenancy was said to become a monthly periodic tenancy terminable on not less than two months’ notice in writing.

The nominee failed to make payments under the mortgage and SPML obtained a possession order on 17 March 2009. Ms Scott, who claimed to have become aware of the order after the event, sought to be joined to those possession proceedings, which had taken place in a County Court northern England. Due to the vast number of SARB cases at that time, and the large number of apparently innocent lenders and vendor-tenants involved, it was agreed that 10 test cases would be advanced and those test cases were transferred to the High Court. The lenders involved included the three lenders represented on appeal; SPML, Mortgage Express and The Mortgage Business (collectively, “the Lenders”).

At first instance, Re North East Property Buyers Litigation [2010] EWHC 2991 (Ch), the matter proceeded by way of three preliminary issues in the High Court (drafted by Miss Sandells, acting on behalf of Mortgage Express at first instance and SPML and Mortgage Express in the Supreme Court). HHJ Behrens determined those preliminary issues in favour of the Lenders, concluding that: (1) even if the promises to the vendor-tenants gave rise to proprietary rights on completion, there was no moment in time in which such a right could bind SPML – Abbey National Building Society v Cann [1991] 1 A.C. 56;  (2) the vendors did not obtain an interest on exchange of contracts because the contract, conveyance and mortgage were one indivisible transaction, per Nationwide Anglia Building Society v Ahmed (1995) 70 P & CR 381; (3) prior to completion the vendor-tenant’s equitable rights were personal and not proprietary; (4) the transfers executed by the vendor-tenants on completion would have transferred any interest in the property pursuant to Law of Property Act 1925 (“LPA 1925”).

The matter was unsuccessfully appealed by the vendor-tenants to the Court of Appeal; Re North East Property Buyers Litigation [2012] 1 W.L.R. 1521. Etherton LJ, giving the lead judgment, held that: (1) a SARB consisted of a separate sale followed by a lease back on completion and did not comprise a reservation of an interest; (2) the contracts recorded that the sales were without reservation; (3) a mortgagee would be entitled to review the transaction in the same way; (4) no equitable interest arose in favour of the vendor-tenants prior to completion; (5) even if an equitable interest had arisen on exchange of contracts in consequence of the assurances made by the borrower-purchaser, Abbey applied.

Permission was then sought, and granted, to appeal to the Supreme Court. The Supreme Court decided two issues. As Lord Collins set out at paragraph 10, “One question is 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. The second question is whether, even if the equitable rights of the vendors were more than merely personal rights, the rationale of the decision of the House of Lords on the Land Registration Act 1925 (“the LPA 1925”) in Abbey National Building Society v Cann [1991] 1 A.C. 56 applies to this case.”

As to the first issue, Ms Scott argued that by virtue of the promise made to her by Mr Foster she had obtained an interest by way of either constructive trust or proprietary estoppel capable of binding SPML, or of overriding SPML’s registered charge by virtue of Schedule 3 of the Land Registration Act 2002 (“LRA 2002”). It was therefore necessary for Ms Scott to establish that she had either retained a proprietary interest at the time of sale, or that she had obtained a proprietary interest in the property prior to the exchange of contracts and therefore pre-completion.

The Supreme Court unanimously found in favour of the Lenders. SARB transactions were held to be sales followed by rent backs, so vendor-tenants could not claim priority on the basis of a reserved interest under the contract of sale. Whilst not fact specific, as set out above, in Ms Scott’s case SPML was expressly informed that there would be vacant possession at the time of sale and that the requisitions on title had not listed any tenancies or leases in place as at the date of completion.

Further, the Supreme Court also held that in order for an unregistered interest to override a registered disposition pursuant to Schedule 3 of the 2002 Act, that interest must itself be proprietary in nature. Accordingly, it was incumbent upon the vendor-tenant to establish that their propriety interest had arisen upon, or prior to, exchange of contracts. The only source of that proprietary interest (the Court having found there was no reserved interest) was the purchaser-borrower (in Ms Scott’s case NEPB’s nominee), who could not herself grant a proprietary interest prior to her acquisition of the legal interest. The alleged proprietary estoppel could only be “fed” upon the nominee’s acquisition of the legal interest; the purchaser-borrower is not entitled to grant a greater interest in the property than she herself holds.

Further, following the dicta of the House of Lords in Abbey, the borrower-purchaser only ever obtained an equity in redemption subject to the Lenders’ respective charges; there was no scintilla temporis between the completion of the purchase and the completion of the mortgage in which the borrower-purchaser held an unencumbered interest in the property from which to grant an unfettered interest in the property to the vendor-tenant. Ergo, any right granted by the borrower-purchaser to the vendor-tenant was subject to the Lenders’ charges, including any right which crystallised once the estoppel had been “fed”; again, the borrower-purchaser is not entitled to grant a greater interest in the property than she holds. Accordingly, whilst the vendor-tenants may have personal claims against the borrower-purchasers arising from the broken promises, they did not have rights in priority to those of the Lenders.

The second decided issued concerned the divisibility of the transaction comprising the sale of the property and the mortgage. Lord Collins framed the question in paragraph 83 as, “whether the contract, conveyance and legal charge were one indivisible transaction” and Baroness Hale at paragraph 95 as “whether the contract should be seen as an indivisible transaction with the conveyance and mortgage”.

The House of Lords in Abbey had concluded that they were. This analysis had been adopted by the Court of Appeal in Ahmed, per Aldous LJ at 389 and, as Lord Collins highlighted at paragraph 97 of his speech in NEPB, it appeared to have been the conclusions of both Lords Walker and Hughes in the Supreme Court in R v Waya [2013] 1 A.C. 294, a case cited by the Lenders in argument.

However, Baroness Hale (with whom Lords Wilson and Reed agreed) disagreed both with the aforementioned line of cases and with Lords Collins and Sumption. She concluded that the contract of sale could not be seen as indivisible from the conveyance and the mortgage. Her position, summarised in paragraph 115, was; “But that may not be true if the mortgage takes place sometime after the conveyance: there may be a period during which the purchaser owns the land without encumbrances. Not all conveyances and mortgages are indivisible: it depends on the facts, which is why Cooke [1952] Ch. 95 may not have been wrongly decided.

Lady Hale continued at paragraphs 116ff, stating that when one looks at the information available to each of the parties and to the distinct agreements to which they are parties (i.e. the contract of sale on the one hand and the mortgage on the other) it could not be said to be a true “tripartite” transaction. Further, when Lord Walker and Lord Hughes expressly referred to the same in R v Waya [2013] 1 A.C. 294 they were neither deciding the point in this context, nor did they intend for the transaction to be understood as tripartite.


This author considers that the positions of Lord Collins on the one hand and Lady Hale on the other are not necessarily incompatible and that the issues raised by Lady Hale, and Lord Reed subsequently, are not necessarily irreconcilable with the conclusion reached by both Lord Collins and the House of Lords in Abbey. It turns upon the method of taxonomy adopted. However, the debate about divisibility, or indivisibility, of conveyance and mortgage is unlikely to have an impact on the outcome of SARB cases going forwards and is therefore best kept for another day. As Lord Collins acknowledged at paragraph 80 of his speech, the issue was irrelevant to the outcome of the appeal once the first issue had been determined in favour of the Lenders.

NEPB has dealt conclusively with the law relating to SARB cases of this nature. The findings of the Supreme Court are not fact specific in this respect. However, the decision in NEPB does not only deal conclusively with SARB transactions, it has clarified the law in relation to the longstanding, and much debated, question over the nature of the right obtained by the purchaser upon exchange of contracts prior to completion. It has also determined the priority of interests in conveyancing transactions, upholding the important House of Lords decision in Abbey (which pre-dated the introduction of the 2002 Act), and has given useful commentary to the law of Land Registration, overriding interests and proprietary estoppel. It is an important decision in a number of respects.  
Accordingly, in almost all cases the Lender’s charges will be safe; the vendor-tenants acquired no more than personal rights against the borrower-purchasers and will not have acquired a right in priority to those of the Lenders. Indemnity insurers for solicitors acting on behalf of the Lenders in SARB transactions will no doubt breathe a sigh of relief; as the Lenders’ security is not in jeopardy from the vendor-purchaser’s overriding interest the Lenders will have acquired the security that they bargained for.
Whether we will now see claims being brought by the vendor-tenants against their conveyancing solicitors is a different matter. Taking into consideration the vast number of SARB transactions, this wave of litigation could be substantial. However, Ms Scott’s conveyancing solicitors were chosen for her by Mr Foster and this appears to have been the case in a number of SARB transactions. It is therefore unclear whether any of those solicitors still exist, can be found, or have insurance.

Nicholas Broomfield
4 New Square