In 2010, the Guildhall Property Newsletter critically analysed Redstone Mortgages plc v Welch  36 EG 98, a decision of His Honour Judge Worster in the Birmingham County Court which had given rise to a lot of head-scratching and a considerable amount of disquiet among those advising mortgagees in possession actions. Those advisors will be relieved to know that the Court of Appeal in the North East Property Buyers Litigation (“NEPB”), reported as Cook v The Mortgage Business plc  1 P&CR 393, has more or less put an end to their concerns.
Welch: A recap
In Welch, a hard-up pair of property owners had entered into a “sale and leaseback” (or “equity release”) transaction with a Ms Welch who had promised the owners that, if they sold the property to her, she would allow them to remain in occupation under an assured tenancy. Unbeknownst to the occupiers, Ms Welch obtained a loan secured over the property in favour of Redstone. When the inevitable default occurred and Redstone sought possession, it was met with an ultimately successful defence that the occupiers had an interest overriding its registered charge. The main element of Judge Worster’s reasoning was that the agreement to grant the tenancy to the occupiers was an indissoluble part of the agreement to sell, and so the title charged to Redstone was already a title encumbered by an “equity” enjoyed by the occupiers (as an estoppel or under the tenancy). Further, the occupants had obtained a legal interest in the unregistrable assured tenancy in the “registration gap” between transfer of title and completion of the transfer and mortgage by registration. This last part of Judge Worster’s reasoning was particularly puzzling, since although he relied on the principles laid down by the House of Lords in Abbey National Building Society v Cann  AC 56, he came to a conclusion which appeared directly to contradict them. In any event, Redstone lost and had to pay £20,000.00 under a pro bono costs award to the Access to Justice Foundation.
The NEPB litigation
So much for Round 1. Round 2 was the NEPB litigation, which involved something close to 100 separate possession claims, 90-odd of which were stayed in order that His Honour Judge Behrens could give a ruling on common preliminary issues in the case reported at  All ER (D) 275 (Nov). The basic story in each was similar. A sale and leaseback entity had bought out the occupiers’ interest in their property and given promises akin to those given in Welch concerning a right to occupy and repurchase, together with the “release” of a lump sum some years in the future. As in Welch, the purchaser mortgaged the properties in order to fund the purchase (or further purchases), and neither the occupiers nor the mortgagees knew of the others’ interest until possession proceedings were afoot.
The key issue with which Judge Behrens was concerned was whether the alleged interests of the occupiers under the tenancies were capable of affecting the estates immediately before the relevant disposition (the registration of the charge) such that they were capable of overriding the mortgagees’ interests in their charges. This was a re-run of the arguments in Welch, and Judge Behrens found convincingly for the mortgagees. Given the importance of NEPB, however, the Judge gave permission to appeal to the Court of Appeal, and at the beginning of 2012 the Court of Appeal handed down its decision, the leading judgment being given by Etherton LJ.
In brief, the occupiers’ principal argument on appeal was that, from the moment of exchange of contracts, they had an equitable proprietary right in the property (whether by virtue of estoppel or trust principles) because of the promises made to them as to their continuing right of occupation. This, they contended, gave rise to an overriding interest under paragraph 2 of Schedule 3 to the Land Registration Act 2002 (“the LRA”), and not merely, as Judge Behrens had held, a personal right against the purchaser. Leading counsel for the occupiers argued that the manner in which the transaction must objectively be analysed was as an agreement to sell subject to a reservation, such that the buyer could not charge more than the interest in the property so encumbered.
In response the mortgagees “subjected the legal interest of a purchaser under an uncompleted contract for the sale of land to a close and penetrating analysis”, said Etherton LJ at . But that close and penetrating analysis was ultimately of little relevance, because in the very next paragraph Etherton LJ went on to suggest that this part of the case had been addressed “on too technical a basis”. Fascinating though the arguments might be, what you really have to do is “to analyse the true commercial and legal nature of the transactions between the ... vendors and the purchasers”, and once that was done in NEPB it was clear that there were two separate transactions between those parties: a sale of the freehold, and a leaseback to the occupier on completion. None of the contracts of sale made any reference to the sale being subject to a reservation, and no third party (including a mortgagee) could have guessed that the vendor was expecting a leaseback after completion. In that circumstance, no equitable property interest could arise prior to completion of the sale. To that extent, the “substance” of the transactions between vendors and purchasers was precisely what was described by the “form” of the documentation.
Turning to the effect of Cann, Etherton LJ held that even if an equity had arisen upon exchange of contracts in favour of the occupiers, there was no moment in time between exchange and completion when the freehold acquired by the purchaser was free from the mortgage but subject to that equity. In each case, exchange of contracts and execution of the transfers and mortgages all took place on the same day.
The appellant occupiers recognised that Cann presented them with a serious obstacle. Their attempt to distinguish it on the basis that the “driver” of the transaction in Cann was to fi nd a new home while in NEPB it was to release equity and secure a continuing right of occupation was never particularly persuasive, and was roundly rejected. In substance and reality, the “driver” of the transaction in each was the need or desire to sell and purchase a property. Invocation of policy rationales for a different approach in NEPB, so as to place the risk of fraud or carelessness on the lenders’ shoulders, similarly failed: why should policy dictate that vendors who choose not to set out the true transaction in the contract of sale should be entitled to take precedence over third party mortgagees who have lent on the faith of the truth of that document?
Taking up the gauntlet thrown down by Judge Worster in Welch, the occupiers then went on to run the puzzling “registration gap” argument. Etherton LJ explained the point at :
“Between completion of the sale of registered land and the registration of the transfer the purchaser is, by virtue of LRA s.24(b), entitled to exercise the owner’s powers in relation to a registered estate. Those powers include ... power to make a disposition of any kind permitted by the general law, including a lease. A lease of 7 years or less does not require to be registered before it is capable of operating at law... The effect of LRA s.29(4) is that, because a lease for 7 years or less is not a registrable disposition, the provisions in s.29(1)-(3) as to the priority of competing interests, apply on the assumption that the grant of the lease is a registrable disposition and was registered at the date of grant. [It] follows ... that an appellant vendor’s rights under a lease for 7 years or less granted by a purchaser in the present cases have priority over a respondent lender’s rights under a subsequently registered charge, even though the charge was executed before the grant of the lease...”
Etherton LJ was, rightly, unimpressed. Before registration of the purchaser as proprietor, his interest is equitable only; that is part of what the modern system of land registration is all about. An equitable owner cannot grant a legal estate. If Parliament had intended by the LRA to overturn this basic principle of land law, it would have done so clearly and by express words. Although Welch was mentioned only in passing by Etherton LJ in NEPB, it follows from his rejection of the argument founded on s.24 and s.29 of the LRA that the “registration gap” analysis of Judge Worster was simply wrong; as noted in the 2010 Newsletter, it in any event fails to take into account Peter Gibson LJ’s analysis in Lloyd’s Permanent Building Society v Fanimi (Lawtel 21/4/97).
Before fi nally dismissing the appeals, Etherton LJ paused to take a shot across the bows of modern conveyancing practice. If the contracts for sale had given details of the entire transaction intended by vendors and purchasers, the problems for the occupiers would not have arisen. The lenders’ solicitors would have had to report the unusual arrangements to their clients. The lenders would then have been in a position to make an informed decision as to whether to proceed. His Lordship concluded by saying, at :
“I do not know why details of those contractual arrangements were not contained in the contracts for sale, but, if the arrangements were intended to be binding on any third party as well as the purchaser – a matter the appellant vendors’ solicitors would have been bound to investigate and advise upon - their omission seems on the face of it plainly inconsistent with proper conveyancing practice.”
I wonder whether the implied criticism is an unfair one. In many of the troubling “equity release” schemes I have come across, the purchasing entity will do all the running, directing the vendors to solicitors, producing the documentation with which to instruct solicitors, and in some cases going so far as specifically to advise the vendors not to reveal the leaseback arrangements to the solicitors. Sometimes, it may justifiably be said that the conveyancers failed to carry out sufficiently close inquiries of their vendor clients to advise them properly on the transaction they wished to conclude. In most, however, the more obvious fault lies with the vendors themselves, who (whether because of the “advice” of the purchasers or otherwise) can appear unwilling to reveal the whole scheme to their solicitors. Be that as it may, Etherton LJ has clearly opened the door to a rash of professional negligence actions against conveyancers in these sale and leaseback transactions. After Welch and NEPB, one can now confi dently predict that Round 3 of this debacle will focus on the solicitors themselves.