Victims of sale and rent back scheme to lose homes – test case

27 Oct 2014

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The Supreme Court could not to come to the aid of victims of sale and rent back schemes in the test case decision of Scott v Southern Pacific Mortgages [2014] UKSC 52.

What is a sale and rent back agreement (SRB)?

SRBs involve individuals selling their homes, usually at a discount and obtaining an agreement to remain in the property for a set period. Typically this is pursuant to an assured shorthold tenancy. The idea is to help homeowners clear their mortgage, or other debts, whilst remaining in their home

Critical path

In 2009 the Financial Services Authority recommended that consumer detriment occurring in this market warranted a fast regulatory response, and in the same year SRB’s were made regulated ac-tivity under Financial Services and Markets Act 2000

In February 2012 the FSA (now the FCA) reported that most SRB transactions were either unafford-able or unsuitable and should never have been sold. Following a review of all regulated SRB firms, the FSA referred one firm to its enforcement division while others either stopped taking on new business or cancelled their permissions. Effectively, this meant the entire SRB market was temporar-ily shut

Subsequently, following a comprehensive review of mortgage markets between 2009 and 2012, the Mortgage Market Review (MMR) final rules were published in October 2012. Reforms to SRB schemes came into force on 26 April 2014

Too little too late for some

On 24 January 2012, the Court of Appeal held, in several conjoined appeals, that the mortgage lenders took priority over the occupiers in the SRB transactions in question. The properties were bought by individuals connected with the SRB organisation. They obtained buy-to-let mortgages in their own names. The mortgagees were unaware of the SRB arrangements. The individuals default-ed on the mortgages. The court held that no equity arose in the sellers’ favour prior to completion and even if it had the mortgagees did not take subject to it.

In Scott v Southern Pacific Mortgages [2014] UKSC 52 a test case, the appeal by one of the sellers has now been dismissed by the Supreme Court (who expressed its sympathy for the sellers) on the principal ground that the sellers (including Mrs Scott) acquired no more than personal rights against the buyers when they agreed to sell their properties on the basis of the buyers’ promises that they would be entitled to remain in occupation. Applying Abbey National Building Society v Cann [1990] 1 All ER 1085 those rights would only become proprietary and capable of taking priority over a mortgage when they were fed by the buyers’ acquisition of the legal estate on completion.

The court did not need to consider whether the mortgage would take subject to their interests if they had acquired a proprietary right, but the court went on to consider the issue anyway

The justices were divided, with Lord Collins confirming that the mortgagees would still not have taken subject to the interests on the basis that the decision in Cann applied to a proprietary equitable in-terest arising at the time of a contract of sale. In Cann the House of Lords’ confirmed that when a buyer relies on a mortgagee to enable completion, the acquisition of the legal estate and grant of the mortgage are one indivisible transaction. There is no moment of time when the legal estate (and so any right to occupation affecting it) vests in the buyer free of the mortgage.

Lady Hale (with whom the other justices agreed) disagreed. A contract, conveyance and mortgage could not be considered as one indivisible transaction.

What are the implications of the judgment?

Joanna Bhatia, PSLProperty lawyer says:

SRB transactions may now be very rare, but that does not assist those affected by this decision. Lord Collins confirmed it was impossible not to feel great sympathy with Mrs Scott and the former home owners in her position, who may have been not only the victims of a fraud which tricked them out of their homes, but also of unprofessional and dishonest behaviour by the solicitors appointed to act for them. They may have claims against the Solicitors’ Compensation Fund, but the fact re-mained that they would lose their homes by not succeeding in the appeal.

Certainly, there seems to be a good argument that they should be protected in the same way as the principles of undue influence protect vulnerable people providing third party security. A contract is voidable where a person is induced to enter into a transaction by undue influence. Undue influence arises where a transaction is to the manifest disadvantage of the person subjected to the dominating influence. It is the abuse of a relationship of trust and confidence or the exploitation of a vulnerable person – so it follows that there must be a relationship of trust and confidence for a presumption of undue influence to arise. That would appear to be the ‘missing link’ here as the lenders had no direct relationship with – and indeed knew nothing about – the sellers.

Indeed, Lady Hale raised the question of the culpability of the buyers and their lenders. She acknowledged that the decision on the principal ground – that a buyer cannot create a proprietary interest in the land, capable of being an overriding interest, until his contract has been completed – produced a harsh result which made her uneasy as:

Cann was not a case in which the seller had been deceived in any way or been made promises which the buyer could not keep. Should there not come a point when a seller who has been tricked out of her property could assert her rights even against a subsequent buyer or mortgagee?
Cann was not a case in which the lenders could be accused of acting irresponsibly in any way. Should there not come a point when the claims of lenders who have failed to heed the obvious warning signs that would have told them that a borrower was not a good risk were postponed to those of sellers who had been made prom-ises that the borrowers could not keep? There ought to be some middle way be-tween the “all or nothing” approach of the present law. On that note, Lady Hale was glad that the Law Commission have included a wide-ranging review of the 2002 Act in their recently announced 12th programme of reform, which is to include the impact of fraud.

It remains to be seen whether the Law Commission will address this particular issue. In the mean-time, the new rules introduced following the mortgage market review appear to be the main protection for vulnerable house-owners.