Homeowners have agreed sale-and-leasebacks deals with investors to overcome debts.
In Scott-v-Southern Pacific Mortgages Ltd (2014), properties were sold to buy to let investors on the understanding the homeowners could remain as the tenants after the sales were completed.
However the sale contracts made no reference to the lease-backs to the sellers.
Some of those landlords had mortgages and failed to maintain mortgage payments.
The lenders were not told about the lease-backs to the sellers. They were informed that the properties were being bought with vacant possession. So they had not consented to the lease-backs.
Did those mortgages take priority over the agreements between the buyers and sellers or were the lenders bound by the agreed lease-back arrangements?
The sellers said they had overriding interests in the houses based on the promised lease-backs which were protected by them being in actual occupation when the sales were completed.
The Supreme Court said the rule that a buyer becomes the equitable owner of the property sold on exchange of contracts “applies only as between the parties to the contract and cannot be extended so as to affect the interests of others” i.e the lenders.
Accordingly the court were unanimous that exchange of contracts had not prior to completion empowered the buyers to confer equitable proprietary rights on the sellers capable of taking priority over the lenders.
So all the sellers had were personal claims against the buyers.
The acquisition of the houses may have been a vital precursor to a mortgage but where a property buyer needs a loan to finance a purchase, the purchase and mortgage form a seamless whole because the buyer would never have got the property without the loan.
The sellers’ claims against the buyers changed from being purely personal claims to being proprietary claims against the properties, capable of binding third parties, when the buyers completed their purchases from them and acquired the legal estates in the houses, but by then it was too late for the sellers to get priority over the mortgages taken by the lenders as an integral part of the house purchase completions.
The decision has important implications for other property transactions where the priority of derivative interests depends on the person granting them already having the legal estate in the property at the key time. The transactions potentially affected include commercial sales and lease-backs.
This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.