Cook v The Mortgage Business Plc

A vendor who sells registered land cannot obtain priority over a purchase-money mortgage by relying on an unrecorded promise of post-completion occupation. Where the sale contract does not reserve that right, no proprietary equity arises before completion capable of overriding the mortgage.

Even if an equity arose on exchange, a purchase funded by a mortgage executed as part of the same transaction gives the purchaser no unencumbered estate, even momentarily. The scintilla temporis analysis is therefore unavailable: [1991] 1 AC 56 applied. Before registration, a purchaser has only an equitable interest and cannot grant a legal lease. In any event, priority protection for a mortgage application under Land Registration Act 2002 section 72 applies against a short lease treated as registered by section 29(4).

These were appeals by four vendors from possession orders made in nine test cases by His Honour Judge Behrens, sitting as a High Court judge. The vendors had sold their homes in sale-and-leaseback arrangements promoted through North East Property Buyers. The purchaser-mortgagors obtained buy-to-let loans from the respondent lenders, defaulted, and disappeared.

The vendors alleged promises that they could remain in occupation and, after completion, purported assured shorthold tenancies were granted. The sale contracts did not refer to a leaseback and were expressed to give vacant possession. The mortgages did not permit the asserted rights of occupation or tenancies.

The judge resolved three preliminary issues against the vendors and ordered possession. The appeals concerned whether a promised right of occupation was an overriding interest, whether a short lease could gain priority under the Land Registration Act 2002, and whether the lenders’ knowledge supplied a defence to possession.

1. The appeals were dismissed. Etherton LJ gave the judgment, with which Rix LJ and the Master of the Rolls agreed. The possession orders therefore stood.

2. The true commercial and legal character of each transaction was an unqualified sale followed, if at all, by a separate leaseback. The sale contracts contained no reservation of a lease, beneficial interest or continuing right of occupation. They instead conveyed full title with vacant possession. Accordingly, no proprietary equity capable of being an overriding interest under paragraph 2 of Schedule 3 to the Land Registration Act 2002 arose before completion from the purchasers’ assurances. The situation was distinct from an unpaid vendor’s lien and from Sargaison v Roberts.

3. In any event, Abbey National Building Society v Cann [1991] 1 AC 56 governed the competing priorities. Where the contract, transfer and purchase-money mortgage were completed as one transaction, the purchaser never acquired an unencumbered estate from which an occupation right could take priority. The court followed Nationwide v Ahmed [1995] 70 P&CR 381: the fact that exchange occurred on the same day did not create a distinct prior transaction. The vendors’ different purpose in selling their homes and the policy arguments advanced did not distinguish Cann.

4. Before registration of the transfer, the purchaser’s interest was equitable only. An equitable owner cannot grant a legal lease. Therefore a purported short lease did not engage section 29 of the Land Registration Act 2002. Even on the contrary assumption, section 29(4) did not displace the lenders’ priority protection under section 72. The statutory assumption that the lease was registrable and registered also required section 72 to apply.

5. The proposed notice-based defence gave no reason for a trial. It lacked demonstrated prospects of success, was not pleaded in every case, and fell within the third preliminary issue, whose negative answer was not appealed.

Etherton LJ added that proper conveyancing practice required the whole sale-and-leaseback arrangement to be recorded in the sale contract, enabling the lender to decide whether to lend on those terms.

1. Court of Appeal (Civil Division): Dismissed the vendors’ appeals and upheld the possession orders: [2012] EWCA Civ 17.
2. High Court: His Honour Judge Behrens determined three preliminary issues adversely to the vendors and made orders for possession on 19 November 2010.