Section 116 of the Land Registration Act 2002 provides:
“It is hereby declared for the avoidance of doubt that, in relation to registered land, each of the following—
(a) an equity by estoppel, and:
(b) a mere equity,
has effect from the time the equity arises as an interest capable of binding successors in title (subject to the rules about the effect of dispositions on priority).”
So an equity, which would include a right to set aside an unconscionable bargain, is an interest capable of binding successors in title.
An interest which falls within any of the paragraphs of Schedule 3 of the Land Registration Act 2002 is not postponed to a registrable disposition under Section 29(1). These interests include:
“An interest belonging at the time of the disposition to a person in actual occupation, so far as relating to land of which he is in actual occupation, except for—
(b) an interest of a person of whom inquiry was made before the disposition and who failed to disclose the right when he could reasonably have been expected to do so“.
The type of residential sale and leaseback which follows is now heavily regulated by financial conduct legislation. It is prohibited unless strict requirements are met.
In Mortgage Express v Lambert  Ms Lambert had been in desperate financial straits. She contacted Annonna Ltd, which was owned and run by Messrs Sinclair and Clement. They visited her at her flat and told her that the flat was only worth £30,000. They offered to buy her lease of it for that. They also said that she would be able to continue living there indefinitely, rent free during the first year and then for £250 per month. The agreement to sell and the promise that Ms Lambert could stay were part of a single bargain.
In the course of the sale, she completed an “Overriding Interests Questionnaire” which her solicitors had sent her. It said she had to disclose all overriding interests of which she was aware, and then gave examples including “rights of persons in occupation”. The form said “If any of the above ARE applicable please enter details below”. She returned the questionnaire but did not disclose any rights. Her solicitors told her that flats like hers were selling at £115,000 to £120,000. Ms Lambert confirmed to them in writing that she had decided to sell at £30,000 of her own free will and had not been pressured into selling at that price. She later confirmed that she was happy to sell at an undervalue because her chief concern was to pay off her loan. She seems to have told the solicitors something about an arrangement for a tenancy but the solicitors do not appear to have made any inquiry about the nature of the leaseback.
Sinclair and Clement made an online application to Mortgage Express for a secured loan of £102,000. In the application form they said that they were applying for a buy-to-let remortgage and that the value of the flat was £120,000.
Sinclair and Clement changed solicitors causing a delay in obtaining a revised offer of a mortgage from Mortgage Express so they completed the purchase with the aid of a £30,000 bridging loan. Ms Lambert sold with full title guarantee. Clause 6 of the sale contract provided that vacant possession would be given on completion. Another special condition said:
“Any Occupier(s) who sign(s) this Contract gives his/her consent to the sale and agrees that vacant possession will be given on the Completion Date free from any estate rights or interest he/she may have in the Property (if any).”
Her solicitors’ replies to requisitions on title said that vacant possession was to be given on completion.
Mortgage Express later sent a new £102,000 mortgage offer based on a £120,000 valuation which Sinclair and Clement accepted. Their solicitors told Mortgage Express that the purchase price was £30,000 and that they were therefore taking out indemnity insurance against the possibility of the sale being set aside as an undervalue transaction if Ms Lambert became bankrupt.
Sinclair and Clement’s solicitors certified that Mortgage Express would obtain a good and marketable title free from any charges or onerous encumbrances, and that the purchase would be with vacant possession. The mortgage to Mortgage Express was completed and the bridging loan was paid off out of it’s proceeds
On 21 January 2008 Messrs Sinclair and Clement were registered at HM Land Registry as proprietors of the lease, and the mortgage to Mortgage Express was registered.
With Mortgage Express’s permission, Sinclair and Clement transferred the lease into Sinclair’s sole name but he failed to keep up his repayments so Mortgage Express appointed receivers. Ms Lambert also fell into arrears with her rent, and the receivers began possession proceedings against her.
The Court of Appeal said that the sale was an unconscionable bargain and that Ms Lambert’s right to have the sale to Sinclair and Clements set aside, for that reason, was capable of being an overriding interest and so it was a right that was proprietary in character.
The mortgage to Mortgage Express was made by Sinclair and Clement. Since they were joint registered proprietors, by sections 34 and 35 of the Law of Property Act 1925 they held the legal estate, and entered into the mortgage, as trustees of land so the capital monies from the mortgage were paid to them. As trustees Section 6(1) of the Trusts of Land and Appointment of Trustees Act 1996 gave them all the powers of an absolute owner.
Section 26 of the Land Registration Act 2002 provides:
“(1) Subject to subsection (2), a person’s right to exercise owner’s powers in relation to a registered estate or charge is to be taken to be free from any limitation affecting the validity of a disposition.
(2) Subsection (1) does not apply to a limitation—
(a) reflected by an entry in the register, or
(b) imposed by, or under, this Act.
(3) This section has effect only for the purpose of preventing the title of a disponee being questioned (and so does not affect the lawfulness of a disposition).”
There was no limitation in the register at the time of the mortgage; nor was there a limitation on the validity of the disposition imposed by the Act itself.
Section 26(3) made it clear that Section 26 aimed only to prevent the disponee’s title from being called into question. Section 26 would defeat any right which was an overriding interest to the extent that that right was a right to impugn the title acquired by the disponee.
If there were an overriding interest that interest would not affect the validity of the disposition consisting of the grant of the mortgage. The mortgage would have taken effect subject to it.
The effect of the mortgage being entered into by two (or more) trustees was governed by section 2 of the Law of Property Act 1925 which provides, inter alia, that:
“(1) A conveyance [which would include a mortgage] to a purchaser of a legal estate in land [which would include a mortgagee] shall overreach any equitable interest or power affecting that estate, whether or not he has notice thereof, if—
(ii) the conveyance is made by trustees of land and the equitable interest or power is at the date of the conveyance capable of being overreached by such trustees under the provisions of sub-section (2) of this section or independently of that sub-section, and the requirements of section 27 of this Act respecting the payment of capital money arising on such a conveyance are complied with…”
The bold words state that notice or otherwise of an interest is irrelevant to the question of overreaching.
What would amount to an overriding interest claim in the case of a sale by one trustee is shifted from the land to the sale or mortgage proceeds if the sale or mortgage was made by two trustees and the capital monies raised by the mortgage were paid to both of them. All this being the case here the only remaining question was whether Ms Lambert’s interest was “capable of being overreached”.
In Birmingham Midshires Mortgage Services Ltd v Sabherwal  Robert Walker LJ said:
“The essential distinction is, as the authors of Megarry and Wade note, between commercial and family interests. An equitable easement or an equitable right of entry cannot sensibly shift from the land affected by it to the proceeds of sale. An equitable interest as a tenant in common can do so, even if accompanied by the promise of a home for life, since the proceeds of sale can be used to acquire another home.”
In the same way, Ms Lambert’s claim against Sinclair and Clement could shift to the proceeds of the mortgage which she could use to buy herself another home. It was different in character from an equitable easement which was one of the rights which made no sense unless it was attached to the land (see observations of Robert Walker LJ above).
So if Ms Lambert did have an interest that was an overriding interest, it was overreached by the grant of the mortgage by two trustees to Mortgage Express and her claim was transferred away from the property to the proceeds of that mortgage to buy herself a new home.
Had it been necessary to decide whether Ms Lambert’s right to have the bargain set aside fell within Schedule 3 paragraph 2 of the Land Registration Act 2002, the court would have said inquiry had been made of Ms Lambert before the disposition (that is to say the grant of the mortgage to Mortgage Express) and that she did not disclose the right that she now asserted. She could not reasonably have been expected to have labelled the right she now claimed as arising from an “unconscionable bargain” but it would have been reasonable for her to have at least disclosed that she was not in fact giving vacant possession and that when transferred to the purchasers the lease would be encumbered by the tenancy that she had agreed to take.
This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.