Sparks of Time, South Pacific, and a Harsh Result

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In 2005, Mrs Rosemary Scott, from Longbenton near Newcastle-upon-Tyne, had money problems. She and her husband had separated and she was finding it difficult to manage. She owned her home, having bought it with her husband from North Tyneside Borough Council in 1999, and she had tried to sell it to raise money, but the only offer she had received was well below the asking price of £156,000.

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Things must have looked pretty hopeless until someone put Mrs Scott in touch with a company called North East Property Buyers. NEPB offered to buy Mrs Scott’s property from her at a price of £135,000, but to allow her to continue to live at the property as a tenant at the discounted rent of £250 per calendar month. She would also receive a lump sum of £15,000 if she stayed as a tenant for ten years. She was to receive £24,000 from the net proceeds of sale. She told the NEPB representative that she wanted to live in the property indefinitely, and he assured her that she could stay as long as she liked and that if she died, the tenancy would be automatically transferred to her son and he would receive the £15,000 lump sum.

It was the answer to her prayers: but perhaps Mrs Scott would have been wise to heed St Teresa’s observation that more tears are shed over answered prayers than unanswered ones. NEPB agreed to pay her legal fees provided she used solicitors nominated by them, which she agreed to do. In the event she sold not to NEPB itself but to a nominee purchaser named Wilkinson. Ms Wilkinson financed the purchase by means of a buy to let loan from Southern Pacific Mortgages Ltd, and her solicitors also acted for Southern Pacific. During conveyancing, Ms Wilkinson’s solicitors asked about vacant possession and Mrs Scott’s solicitors replied that arrangements could be made directly with her “as to both handover of the keys and the time that vacant possession will be given”. On the Standard Conditions of Sale, neither seller nor buyer specified whether the property was being sold with vacant possession or subject to a tenancy. The sale contract, the execution of the legal charge and the completion of the TR1 all took place on the same day, namely August 12, 2005; the transfer and the charge were registered on 16 September.

Those of my readers who are wondering how a company called South Pacific Mortgages came to lend on a property which is considerably closer to the Bank of Dogger than to Bali H’ai may be interested to know that SPML was originally one of three English secured lending entities of Lehman Brothers, although it has been operated by another company since 2008.

On 16 August 2005 a company called “UK Property Buyers” acting as agents for Ms Wilkinson granted Mrs Scott a two-year assured shorthold tenancy at the reduced rent. After the term expired, the tenancy would become a monthly periodic tenancy terminable on not less than two months’ notice in writing. On the same day, Mrs Scott received a document promising that she could remain in the property as the tenant and that she would get the £15,000 loyalty payment after 10 years.

This was of course not what Mrs Scott had been promised before she sold her house, though she did not realise that at the time. The tenancy she had been granted was one with very limited security of tenure, and certainly did not come anywhere near a tenancy which would entitle her to remain in the property for as long as she wanted; it was also not capable of being inherited by succession. She was also not to know that the tenancy for life which she had initially been promised was not permitted by the terms of the SPML mortgage, and that SPML were unaware of that promise. Nor was she alone. By 2008 the Office of Fair Trading estimated that there were about 50,000 people in these “sale and leaseback” arrangements, many of whom were extremely vulnerable to eviction.

But by August 2008 Mrs Scott had her own problems. She received a letter from “North East Property Lettings” suggested that because of issues surrounding an office move, some tenants might have received letters from mortgage companies saying that their accounts were in arrears, but that this was incorrect. This seems to have been the first time that Mrs Scott was made aware that there might be a mortgage on the property. Then in about March or April 2009 she accidentally opened a letter addressed to Ms Wilkinson which had come to the house, and discovered that a possession order had been made on 17 March 2009. This was swiftly followed by a warrant of possession due to be executed on 20 May 2009. That warrant was then suspended so that Mrs Scott could be joined as a defendant in the possession proceedings. The main plank of her case was that she had an overriding interest as a person in actual occupation under the Land Registration Act 2002 which was binding on Southern Pacific. If she could not succeed on that point, then she would be evicted.

By this time there were quite a number of people in the same position as Mrs Scott: when the matter was heard by HHJ Behrens in Newcastle in 2010, she was one of nine sellers to NEPB who were facing eviction in the greater Newcastle area, and there were others farther afield. By the time the matter reached the Supreme Court in August of this year, Collins LJ noted that there were now 90 or so cases in the Newcastle area involving 20 different lenders, and many more in other parts of the country. They all revolved around the same issue, namely whether sellers such as Mrs Scott had an overriding interest under LRA 2002 which was binding on the mortgagee. Mrs Scott’s case was selected as a specimen case and it was therefore the history of her predicament which the Supreme Court looked at it in detail.
Before looking at the law, I bring to your attention the prefatory words of Collins LJ in the Supreme Court judgment on Mrs Scott’s case and the associated cases:

“It is impossible not to feel great sympathy with Mrs Scott and the former home owners in her position, who may have been not only the victims of a fraud which tricked them out of their homes, but also of unprofessional and dishonest behaviour by the solicitors appointed to act for them …. “ [paragraph 24, p. 6].

He further noted, at paragraph 88, that

“it is also important to emphasise that the scheme in the present case could not have worked if the solicitors for the vendors and the solicitors for the purchasers/lenders had complied with their professional obligations and proper and normal conveyancing practice … “ .

But none of this could lessen the impact of the harsh truth, which was and is that Mrs Scott and her fellow sellers do not have an overriding interest which is binding on Southern Pacific, and which therefore prevents Southern Pacific from obtaining possession against them. The result is therefore that she and her fellow-litigants will be evicted from their homes unless Collins LJ’s recommendations to mercy (“I express the hope that the lenders will, before finally enforcing their security, consider whether they are able to mitigate any hardship caused to the vendors”) [para 94] bear some fruit. Hale LJ also made some extremely interesting observations about this result, which I’ll come back to in due course. For now, let’s look at the law.

Scott is the latest iteration of a perennial problem which, stripped down, has the following factual matrix, subject to variants. Buyer (B) agrees to purchase property from seller (S). To purchase the property, B needs to raise a loan from mortgagee (M). At the same time or not long after a sale is agreed, but before B has a legally enforceable title or has executed the charge, B purports to grant a right over the property (usually, though not always, a tenancy) to O. O then goes into (or sometimes remains in) occupation. Once the transfer and the charge have been executed, dispositions of the property have taken place within the meaning of the LRA 2002 (and the LRA 1925 before it), but those dispositions do not take effect in law until the transfer and the charge are registered. There is therefore a period of limbo in which B and M have equitable rights which are not yet legally enforceable. Later, things go wrong, and O asserts that s/he takes priority over M because his/her interest was protected by actual occupation at the time the charge was registered. Most of the cases discussed in Scott conform to this admittedly very broad description: the most important for our purposes are Abbey National Building Society v Cann [1991] 1 AC 56 and Nationwide Anglia Building Society v Ahmed (1995) 70 P&CR 381.

Cann has been widely considered since 1991 to have closed down the argument that actual occupiers can take priority over a lender in circumstances where without M’s money, B could not have bought the property. The case was decided under the 1925 Land Registration Act and the old section 70(1)(g), which have now of course been replaced by the LRA 2002. Mrs Cann [O] had argued that there was a very short period of time – a nanosecond would have been enough – in which B had owned the freehold free of any charge and in that nanosecond he had been able to, and had, granted her what in effect was a lifetime tenancy. This was referred to rather elegantly in Cann as the scintilla temporis, or minute particle (“spark”) of time, but nanosecond conveys the same idea.

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The House of Lords rejected the scintilla argument decisively, saying that where B 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 one indivisible transaction – in other words, there is no nanosecond during which B can grant an interest to O. Cann also decided that all that B actually gets in these circumstances is an equity of redemption, rather than the unencumbered freehold, and on that basis too he has no ability to grant a tenancy to O: in reality, the land comes to him with the charge already impressed upon it. Cann was a case in which the transfer and the charge were executed on the same day, though the contracts were exchanged about a month before.

One of the sellers’ arguments on this appeal was that the effect of the LRA 2002 on the point was subtly different from section 70(1)(g) of the 1925 Act. Unsurprisingly, it was held that the effects of the 2002 Act (particularly ss.28 and 29 on priorities and Schedule 3 paragraph 2 on interests protected by actual occupation) are the same for practical purposes as under the previous law.

But the sellers in Scott further argued that their position was factually and legally distinguishable from Mrs Cann. For one thing, they had been the sellers as well as the occupiers, and they had sold their properties relying on the promise that they would get what would in broad terms be a life, or at least a very secure, tenancy. Their rights had arisen at the date of the exchange of contracts, unlike Mrs Cann, whose rights had only commenced at the date of transfer. One legal question was therefore whether B was able to grant proprietary rights over the property to O at the exchange stage; this had not been considered in Cann. Even if that was right, there was the further question of whether the Cann principles applied where the rights had arisen earlier than the transfer: in other words, was the exchange of contracts part of the “one indivisible transaction” that was certainly composed of at least the transfer and the charge.

Collins LJ first considered whether or not B was able to grant proprietary rights to O at exchange rather than at transfer. There was some really interesting argument on what rights B has between exchange and transfer, but ultimately Collins LJ found that, largely on the basis of Cann and the cases it affirmed, B did not have the ability to grant proprietary rights to O before transfer. The foundation of the reasoning was the old doctrine of “feeding the estoppel”. In brief, a party X without an estate in land can promise a tenancy to Y; while X continues estateless, Y has only a personal remedy against X (and no claim to the land itself). However, if X in due course obtains an estate in the land, then the estoppel “is fed” and Y has acquired an enforceable lease. The authority Collins LJ relied on was Cuthbertson v Irving (1859) 4 H & N 742, affirmed as recently as 1998 in Bell v General Accident Fire and Life Assurance Corpn L&TR 1. Although the Cann line of cases did not set out the principle directly, for Collins LJ it was implicit in the way that the position of Mrs Cann had been discussed [see para 74].

The question of whether the contract formed part of the “one indivisible transaction” propounded in Cann therefore did not apply, because O had not any proprietary interest to begin with. Nonetheless, Collins LJ went on to consider this question, primarily because the appeal had been based on it. He found authority in the form of Nationwide Anglia Building Society v Ahmed (1995) 70 P&CR 381, where Aldous LJ had found that the contract of sale, the transfer and the legal charge had together formed an indivisible transaction, and expressly affirmed it [para 85]. He added “the contract of sale does, of course, have separate legal effects, but it would be wholly unrealistic to treat the contract for present purposes as a divisible element in this process” [87]. Sumption LJ agreed with him, but on this particular point Hale, Wilson and Reed LLJ were less sure.

Lady Hale gave a short judgment dissenting on the indivisibility point, giving some further helpful views on the question of whether a purchaser can transmit a proprietary interest to an occupier. In the context of the new law on land registration, she remarked that the underlying law relating to the creation of estates and interests in land remained the same. The starting point had to be what proprietary interests are recognised by the law, then to ask whether the conveyancing machinery had given effect to them and what the consequences were it not: “otherwise we are in danger of letting the land registration tail wag the land ownership dog”.

From this general observation she went on to consider the Cann line of cases, endorsing the point that in each of them the interest of B between contract and completion was not sufficient to support the lease, but noting that in one of the cases, Universal Permanent Building Society v Cooke [1952] Ch 95, the mortgage had been executed the day after the conveyance. There was no evidence that the conveyance and the mortgage were one and the same transaction, or that B had needed the mortgage to purchase the property. There may therefore be the occasional case, although it would be very rare, where a conveyance may not form part of one indivisible transaction with the execution of the charge.

Alas, none of this helped Mrs Scott. Even if she had acquired some proprietary right, and all of the Judges were clear that she had not, the contract, transfer and charge in her case had been executed on the same day and Cann’s indivisibility principle applied. The result, as we have already seen, is that she will lose her home. Hale LJ “confessed to some uneasiness” about the conclusion that led to this outcome, for two reasons:

“First, Cann was not a case in which the vendor had been deceived in any way or been made promises which the purchaser could not keep. Should there not come a point when a vendor who has been tricked out of her property can assert her rights even against a subsequent purchaser or mortgagee? Second, Cann was not a case in which the lenders could be accused of acting irresponsibly in any way. Should there not come a point when the claims of lenders who have failed to heed the obvious warning signs that would have told them that this borrower was not a good risk are postponed to those of vendors who have been made promises that the borrowers cannot keep?”

Two very good questions, although there are answers to neither at the moment. Hale LJ noted that the Law Commission is to review the operation of the LRA 2002 shortly and that that review will include the impact of fraud, which has caused a number of other problems in Land Registration in recent years. It is therefore extremely likely that the Law Commission will specifically attempt to provide some answers.

The legal reasoning in Scott is unimpeachable: the unfortunate result is that the sellers, to whom the subject matter of these actions matters most and who are the worst placed to bear the losses, lose everything. It will be small comfort to Mrs Scott and those who share her position that, as Collins LJ noted, she may have a claim against the Solicitors’ Compensation Fund. It is a case in which the law has been applied with meticulous correctness, yet justice has not been done.