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Scott v Southern Pacific Mortgages Ltd & Ors [2014] UKSC 52 (22 October 2014)
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Rosemary Scott (Appellant/Second Defendant)andSouthern Pacific Mortgages Limited (Claimant/First Respondent)andMortgage Express (Second Respondent)andAmee Lydia Wilkinson (First Defendant)andThe Mortgage Business Plc (Intervener)
before
Lady Hale
Lord Wilson
Lord Sumption
Lord Reed
Lord Collins
The transactions with which this appeal is concerned arose during a period when sale and rent back transactions were common. They were what was described by the Office of Fair Trading in 2008 (Sale and rent back: An OFT market study) as a relatively new type of property transaction whereby firms bought homes from individuals, usually at a discount, and allowed the former home owners to stay on in the property as tenants. The deals were often sold to home owners in financial difficulties and the firms selling them often told the home owners that they would be able to stay in their homes for years, when in fact the tenancies were rarely granted for more than six or twelve months. Many firms financed the purchase of the properties through secured borrowing, and former owners were being evicted following proceedings for possession by mortgage lenders after the purchasers defaulted on their loans. The home owners did not fully understand the risks involved, and the OFT's research found that solicitors provided by the sale and rent back companies to provide advice to the seller were sometimes suspected to be acting for the companies as well. By the time of the study the OFT estimated that there were 1,000 firms involved in selling the schemes and about 50,000 transactions.
In 2009 the Financial Services Authority recommended that consumer detriment occurring in this market warranted a fast regulatory response, and in the same year sale and rent back transactions became a regulated activity under section 19 of the Financial Services and Markets Act 2000. As a result, in February 2012 the FSA reported that most sale and rent back transactions were unaffordable or unsuitable and should never have been sold, but that in practice the entire market had shut down. They are now very rare.
This is an appeal in one of what were originally ten test cases in which the defendant home owners 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 homes with the assistance of mortgages from lenders, who were not given notice of the promises to the home owners. Criminal charges are pending and the original owners and the lenders may have been the victims of a fraud. Some of the solicitors involved in the transactions were subsequently the subject of disciplinary proceedings. Ultimately this appeal will determine which of the innocent parties will bear the consequences.
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Conclusion
This case has been decided on the simple basis that the purchaser of land cannot create a proprietary interest in the land, which is capable of being an overriding interest, until his contract has been completed. If all the purchaser ever acquires is an equity of redemption, he cannot create an interest which is inconsistent with the terms of his mortgage. I confess to some uneasiness about even that conclusion, for two reasons. First, Cann was not a case in which the vendor had been deceived in any way or been made promises which the purchaser could not keep. Should there not come a point when a vendor who has been tricked out of her property can assert her rights even against a subsequent purchaser or mortgagee? Second, 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 this borrower was not a good risk are postponed to those of vendors who have been made promises that the borrowers cannot keep? Innocence is a comparative concept. There ought to be some middle way between the "all or nothing" approach of the present law. I am glad, therefore, that the Law Commission have included a wide-ranging review of the 2002 Act in their recently announced Twelfth Programme of Law Reform (2014, Law Com No 354), which is to include the impact of fraud.
We agree that this appeal should be dismissed for the reasons given by Lord Collins and Lady Hale. On the point on which they disagree, the indivisibility of the contract from the conveyance and the mortgage, which is not part of the reasons for the decision, we agree with Lady Hale.
Rosemary Scott (Appellant/Second Defendant)andSouthern Pacific Mortgages Limited (Claimant/First Respondent)andMortgage Express (Second Respondent)andAmee Lydia Wilkinson (First Defendant)andThe Mortgage Business Plc (Intervener)
before
Lady Hale
Lord Wilson
Lord Sumption
Lord Reed
Lord Collins
The transactions with which this appeal is concerned arose during a period when sale and rent back transactions were common. They were what was described by the Office of Fair Trading in 2008 (Sale and rent back: An OFT market study) as a relatively new type of property transaction whereby firms bought homes from individuals, usually at a discount, and allowed the former home owners to stay on in the property as tenants. The deals were often sold to home owners in financial difficulties and the firms selling them often told the home owners that they would be able to stay in their homes for years, when in fact the tenancies were rarely granted for more than six or twelve months. Many firms financed the purchase of the properties through secured borrowing, and former owners were being evicted following proceedings for possession by mortgage lenders after the purchasers defaulted on their loans. The home owners did not fully understand the risks involved, and the OFT's research found that solicitors provided by the sale and rent back companies to provide advice to the seller were sometimes suspected to be acting for the companies as well. By the time of the study the OFT estimated that there were 1,000 firms involved in selling the schemes and about 50,000 transactions.
In 2009 the Financial Services Authority recommended that consumer detriment occurring in this market warranted a fast regulatory response, and in the same year sale and rent back transactions became a regulated activity under section 19 of the Financial Services and Markets Act 2000. As a result, in February 2012 the FSA reported that most sale and rent back transactions were unaffordable or unsuitable and should never have been sold, but that in practice the entire market had shut down. They are now very rare.
This is an appeal in one of what were originally ten test cases in which the defendant home owners 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 homes with the assistance of mortgages from lenders, who were not given notice of the promises to the home owners. Criminal charges are pending and the original owners and the lenders may have been the victims of a fraud. Some of the solicitors involved in the transactions were subsequently the subject of disciplinary proceedings. Ultimately this appeal will determine which of the innocent parties will bear the consequences.
................
Conclusion
This case has been decided on the simple basis that the purchaser of land cannot create a proprietary interest in the land, which is capable of being an overriding interest, until his contract has been completed. If all the purchaser ever acquires is an equity of redemption, he cannot create an interest which is inconsistent with the terms of his mortgage. I confess to some uneasiness about even that conclusion, for two reasons. First, Cann was not a case in which the vendor had been deceived in any way or been made promises which the purchaser could not keep. Should there not come a point when a vendor who has been tricked out of her property can assert her rights even against a subsequent purchaser or mortgagee? Second, 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 this borrower was not a good risk are postponed to those of vendors who have been made promises that the borrowers cannot keep? Innocence is a comparative concept. There ought to be some middle way between the "all or nothing" approach of the present law. I am glad, therefore, that the Law Commission have included a wide-ranging review of the 2002 Act in their recently announced Twelfth Programme of Law Reform (2014, Law Com No 354), which is to include the impact of fraud.
We agree that this appeal should be dismissed for the reasons given by Lord Collins and Lady Hale. On the point on which they disagree, the indivisibility of the contract from the conveyance and the mortgage, which is not part of the reasons for the decision, we agree with Lady Hale.
