Can new rights for sellers bind mortgage companies?

What consequences will the Supreme Court’s decision in Scott v Southern Pacific Mortgages Ltd have in practice? Paul Heely, banking and finance partner at TLT, the lead firm in the group litigation and acting for the principal respondent lender in the appeal, considers the issues.

Scott v Southern Pacific Mortgages Ltd [2014] UKSC 52, [2014] All ER (D) 251 (Oct)

The present appeal was one of ten test cases in which the defendant home owners (the vendors) were persuaded to sell their properties to purchasers who promised the vendors the right to remain in their homes after the sale. The purchasers bought the home with the assistance of mortgages from lenders, who were not given notice of the promises to the vendors. The purchasers defaulted on the loans and the lenders sought possession of the homes. The Supreme Court held that the vendors had acquired no more than personal rights against the purchasers when they agreed to sell their properties on the basis of the purchasers' promises that they would be entitled to remain in occupation. Accordingly, the vendors did not have interests whose priority was protected by virtue of the Land Registry Act 2002, s 29(2)(a)(ii) of, and Sch 3, para 2.

What were the key features of this appeal?

Ultimately there was one question for the Supreme Court—prior to the completion of the sale of a residential property can the buyer grant to the seller a new interest in it that binds the mortgage company that is funding the purchase? This threw up various legal arguments about trusts, equitable estoppel and land registration law. The Supreme Court decided that any new right that was created for the seller could not bind the mortgage company. This will be a relief to lenders, many of whom are involved in the hundreds of civil cases on hold pending this judgment.

What is the significance of this decision in terms of the conflict between right to possession and right to continue occupation?

Lenders need to know the market value of a mortgaged property in order to decide whether to lend on it. But value can be dramatically affected by someone having a right to occupy. For many years the law has carefully balanced the lender’s requirement for certainty of the value of their security, with the need to give some occupier