Mortgagees' rights take priority to lessees' rights in equity release schemes where properties were sold with full title guarantee and vacant possession.

In a number of test cases heard together as the North East Property Buyers' Litigation, vendors had sold their homes in equity release schemes. The purchaser had allegedly promised the vendors a right to continue to occupy the properties. The purchaser acquired the properties with the benefit of "buy-to-let" mortgages telling the lender that assured shorthold tenancies of six months' duration were to be granted.

The shorthold tenancies granted were actually from between two to 10 years. The purchaser defaulted upon the mortgages and the mortgagees obtained possession orders. The vendors appealed. The issue for determination was whether the vendors had any entitlement to continue to occupy despite that right being prohibited by the mortgage.

The Court of Appeal held that the contracts for sale of the properties provided expressly that they were sold with full title guarantee and with vacant possession. They made no mention of a lease back on completion.

The clear impression given was that no beneficial interests or rights in the property were being reserved to the vendors. There was nothing to alert the mortgagees to the possibility that the vendors would remain in possession or that the purchaser would get anything less than the entire legal and beneficial interest in the properties. No equitable interest arose for the vendors prior to completion. It was not appropriate to place on the mortgagees the risk of any misrepresentations made to the vendors because they could or should have made direct enquiries of the vendors.

The mortgagees were entitled to possession.

Things to consider

There was nothing to place the mortgagees on notice as to the agreement that had been reached between the vendors and purchaser. The vendors' problems would have been avoided if the contracts for sale had given full details of the contractual agreement between the vendors and purchaser including the right to occupy following completion. The mortgagees could then have decided whether to make the loans or not.