Dangers of sale and leaseback

Former homeowners lose mortgage possession claims where purchaser fails to pay

 

Nine home-owners who had engaged in sale and leaseback arrangements lost their appeals against possession orders sought by mortgagees following the purchaser’s non-payment of the regular mortgage instalments. 

In each case the purchaser had applied for a mortgage loan; the application form disclosing that the property was being purchased on a "buy-to-let" basis and that the tenancies granted would be assured shorthold tenancies of six months' duration. On that basis secured loans were made. Exchange and completion occurred on the same day. Thereafter, the purchaser purported to grant assured shorthold tenancies to the original owners, the terms varying from two to ten years.  The issue for determination was whether a mortgagee's right to possession had priority over, or was subject to, any entitlement of the vendor to continue in occupation where the right asserted by the vendor was prohibited by the mortgage.

Crucially, each contract for sale provided expressly that the property was sold with full title guarantee and with vacant possession, making no reference to the grant of a lease to the original owner on completion. The clear impression created by the contracts was therefore that the owner would be selling without reserving any beneficial interests or other rights in the properties. That was how the mortgage lender was entitled to view the matter. The contracts disclosed no basis for a qualified report on title to the lender by its solicitors which would have alerted it to the possibility that the original owner expected to remain in possession after completion, or that the purchaser would obtain anything less than the entire legal and beneficial interest in the properties.  In those circumstances, no equitable interest or equivalent equity could have arisen in favour of the seller and intended tenant prior to completion.

The problems that had arisen for the appellant former owners would have been avoided if the contracts for sale had given details of the entire contractual deal between them and the “sale and leaseback” purchaser, and if the precise contractual arrangements that were to operate in relation to the owners’ occupation after completion had been clearly stated.   In such circumstances the lender’s solicitors would have been bound to report those contractual arrangements to it, enabling it to decide whether or not to make a loan in view of those disclosed risks.

Cook v Mortgage Business plc (Respondent) & Mortgage Express (Interested Party) & 8 conjoined appeals  [2012] EWCA Civ 17 (Lord Neuberger MR, Rix &  Etherton LJJ

 

Date Added: 25th January 2012