To the relief of mortgage lenders the Supreme Court has unanimously dismissed the appeal in Southern Pacific Mortgage Limited v Scott. This was the last in a series of cases involving North East Property Buyers (NEPB), a sale-and-rent-back scheme which targeted home owners facing difficulties with their mortgage repayments.
A home owner sold their property at an undervalue to a NEPB nominee in return for a promise that they could stay in the property as a tenant at a low rent for life. The purchase was funded by a mortgage but the lender was unaware that the seller would remain in occupation. The occupiers argued that they had an overriding interest which took priority over the lender's mortgage when the lender sought to take possession.
The arguments in the High Court concentrated upon whether an overriding interest could be defeated by enquiries of the seller by the lender. However in the Court of Appeal and now the Supreme Court, the long established case of Abbey National v Cann was upheld. This states that because the NEPB nominee could not fund the purchase without the lender's mortgage, the nominee did not have title to grant a life tenancy to the vendors prior to completion. This issue is often referred to as the 'registration gap'.
As a result the nominee could not confer equitable proprietary rights on the seller before completion of the purchase and the simultaneous grant of the new mortgage. A personal contractual right against the nominee to the grant of a tenancy for life would not bind a mortgagee who was not aware of it. If the decision had gone the other way lenders’ concern about the greater risk from unknown interests may have caused them to extend their due diligence to include detailed scrutiny of the parties behaviour in the run-up to a sale and grant of charge, the delay and cost of which could have adversely affected residential lending in England and Wales. Whilst the decision relates to residential property the same legal principles would apply to commercial real estate transactions.
Of course there is sympathy for those who lost their homes as a result of these schemes, and it is likely that solicitors for all parties involved in them will face questions over whether they acted professionally and complied with proper conveyancing practice. From 2009 such sale and rent back transactions of dwellings by individuals became a regulated activity under the Financial Services and Markets Act 2000 and, as a result, are now very rare.