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Sale and Rent-Back Schemes – lenders’ rights take priority over promises of occupation

Assurances made by a purchaser to a homeowner that they could remain in occupation after completion of a sale and rent-back scheme did not amount to the grant of ownership rights taking priority over the purchaser’s mortgagee.

This was the judgment of the Supreme Court in the test case of Scott v Southern Pacific Mortgages Ltd and others [2014] UKSC 5, which formed part of what has become known as the North East Property Buyers Litigation, involving a number of sale and rent-back transactions. The case has received wide-spread publicity given its implications for the users of this type of equity release scheme, which became highly popular in the residential sector before it became a regulated activity in 2009.

The defendant home-owner, Mrs Scott, sold her property to Ms Wilkinson, a purchaser nominated by an entity called North East Property Buyers. NEPB promised Mrs Scott that after the sale, she would be able to stay in her home indefinitely as a tenant paying a discounted rent. To finance the purchase, Ms Wilkinson took out a “buy to let” mortgage which proceeded on the basis that the purchase was at full value with vacant possession.  The purchase and the mortgage completed on the same day and the tenancy agreement was completed shortly afterwards.  Ms Wilkinson subsequently defaulted on her mortgage payments and the lenders sought possession of the home.

The Court had to decide whether, between exchange of contracts and completion, Ms Wilkinson was able to grant valid ownership rights to Mrs Scott by virtue of the promises that had been made by NEPB.  If so, those rights would take priority over the lender’s right to repossess and sell the property.  The Court held that the promises made to Mrs Scott could not amount to an ownership right which would bind the lender because Ms Wilkinson did not fully own the property herself until after completion.  As such, she was not in a position to grant property rights to the occupiers which took priority over those of the lenders.

Further, applying previous case law, the Court maintained that the house purchase and the grant of the mortgage formed one indivisible transaction and there was no moment in time when the rights of a home-owner occupier could have intervened to bind the lender.

Despite entering into the sale and rent-back transactions in reliance on NEPB’s assurances of future occupation, the lenders’ rights to sell took priority over the assurances made to the occupiers.

Although hard on the home-owners – who now stand to lose their homes – the case has re-affirmed the principle that promises made by a purchaser before becoming the legal owner, do not amount to ownership rights which will trump a lender.