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North East Property Buyers Litigation: Supreme Court decision 23 October 2014

Yesterday the Supreme Court handed down its decision in the North East Property Buyers Litigation (Scott v Southern Pacific Mortgages Ltd [2014] UKSC 52).  This was one test case arising out of a series of transactions in which owners of properties who were having difficulty repaying their mortgages were persuaded to sell their homes (at considerable discounts) to an organisation called North East Property Buyers (NEPB), in exchange for the promise of being allowed to stay in the property either for a fixed term or (in many cases, including this one) indefinitely.  Apparently there are another 90 or so cases in the Newcastle area involving NEPB and some 20 different lenders, but also many other cases in other parts of England involving similar schemes.

In fact, the paperwork was at odds with the transaction that the seller expected to be entering into. The houses were actually being sold to individual nominees, with the transactions being financed by buy-to-let mortgages.  The lenders were being told that the properties were being acquired with vacant possession and were then going to be let.  In fact the sellers remained in possession at the time of the sale, and were granted assured shorthold tenancies after completion.

So – when the nominee owner fell into arrears and the lender sought possession, whose rights should take precedence ?  The innocent seller or the innocent lender ?  An age-old question of which of two innocent people should suffer loss due to the fraudulent behaviour of a third party (and, it seems, some very nefarious solicitors).

To cut a long story short, the Supreme Court held that the lender’s rights prevailed.  The seller’s argument was that she had an equitable interest in the property (arising out of NEPB’s assurance that she could stay in it indefinitely after the sale) from the moment of exchange of contracts, which amounted to an overriding interest by virtue of her occupation and that this gave her priority over the lender.

The Supreme Court held that the seller could not acquire any equitable interest in the property until the buyer acquired the legal title.  At the time of exchange of contracts, all that arose was a personal contractual right against the buyer, not a proprietorial right.   But at completion, since the finance was being provided by the lender contemporaneously with the purchase, and to enable the purchase to take place, there was no moment during which the seller’s rights had the opportunity to take priority over the lender’s rights.  The purchase and the mortgage constituted one indivisible transaction in accordance with the House of Lords decision in Abbey National Building Society v Cann [1991] 1 AC 56.

Two of the Justices (Lord Collins, with whom Lord Sumption agreed) also considered that, even if (which was not the case) the seller had obtained a proprietorial interest at the time of the contract, it would not still have resulted in the seller having priority over the lender.  This was strictly obiter, given the finding that no proprietorial interest did arise on exchange of contracts.

The other three Justices (Lady Hale, with whom Lord Wilson and Lord Reed agreed) said that they would have taken a different view on the indivisibility of the transaction (ie whether the contract, the transfer and the charge were all effectively one transaction) if a proprietorial interest had arisen on exchange of contracts.  However, again this was immaterial to the actual decision given that they too held that in this case the seller did not obtain any proprietorial interest (and hence there was no overriding interest by virtue of occupation) until the buyer had completed the acquisition of the property, by which time the lender’s rights had prevailed in accordance with Abbey National Building Society v Cann.  (The fact that the two Justices openly differed in their views on the second issue might be thought surprising, given that both accepted that the position was unlikely to arise in practice.)

In her conclusion, Lady Hale made it clear that she was not happy with the conclusion that the court had been required to find (and in particular the “all or nothing” approach of the decision in Abbey National Building Society v Cann, which ignores the relative “innocence” of the parties), and she hopes that this issue will be considered by the Law Commission in its forthcoming review of the Land Registration Act 2002.  Both Lord Collins and Lady Hale expressed sympathy for the victims of the fraud but emphasised the importance of ensuring that the land registration system provides certainty for both buyers and lenders.

This article is merely a (relatively) short summary of the decision, based on the Press Summary very helpfully prepared by the Supreme Court itself.  We now need to analyse the speeches in detail.  On a first inspection, there seem to be some particularly interesting observations on the nature of the respective interests of a seller and buyer during the period between exchange of contracts and completion.  It is often said that the seller becomes a trustee for the buyer, but this is not a conventional trustee-beneficiary relationship.  That can be the subject of a separate article next week.

You can download the transcript from the Supreme Court website here.

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