Equity release schemes
In these recent hard times, many registered property owners facing repossession by their lenders have resorted to selling their properties to a purchaser who pays off the mortgage and agrees to let the former owners have a tenancy agreement, sometimes promising them that they can stay for as long as they like. Problems have then arisen when the new owners have failed to pay the mortgage and the lenders have sought to repossess the properties and evict the sellers.
In the North East Property Buyers litigation, the Court of Appeal had to decide in nine test cases whether the sellers occupying the properties after completion had any rights which would prevent the lenders evicting them.
The classic scenario and key features on which the court based its findings are as follows:
• A rather shadowy body called North East Property Buyers (NEPB) promises the registered property owner (the seller) that he will be able to stay living in the property after completion, usually for a lengthy period of time, on condition that the seller will pay rent and comply with the terms of a tenancy agreement;
• The contract for sale provides expressly (at least in some cases) that the property is sold with full title guarantee and with vacant possession. No mention is made in any of the contracts to the grant of a lease or Assured Shorthold Tenancy (AST) to the seller on completion;
• On completion of the sale, the property is transferred into the name of someone nominated by NEPB (the purchaser), who essentially takes no part in the litigation;
• In most of the cases, the price paid is the market value but the seller has to pay back to NEPB a significant part of the balance of the completion money after the mortgage has been redeemed;
• The purchaser in each case applies for a loan from a mortgage lender (the lender) stating that the purchase is on a “buy-to-let” basis and that the tenancies are ASTs of six months’ duration. Mortgages are granted on the strength of that information;
• Exchange of contracts, completion of the contract by the execution of the transfer, and the execution of the mortgage, all take place on the same day;
• An AST is granted by the purchaser to the seller;
• The purchaser fails to pay the mortgage leaving substantial arrears.
The Court of Appeal held (with some apparent regret) that the seller (on these facts) had no rights as against the lender, and consequently the lender was entitled to take possession and realise its security.
The correct approach was to analyse the true commercial and legal nature of the transactions between the seller and purchaser. The court said there were two separate transactions: one for the sale of the freehold and one for a leaseback to the seller upon completion.
The clear impression created by the sale contracts was that the sellers would be selling without reserving any beneficial interests or other rights in the property. That is how the lenders were entitled to view the transactions.
The contracts disclosed no basis for a qualified report on title to the lenders by their solicitors which would have alerted the lenders to the possibility that the sellers expected to remain in occupation after completion or that the purchasers would obtain anything less than the entire legal and beneficial interest in the properties.
The court found, on these facts, that no equitable interest, or equivalent equity, could have arisen in the seller’s favour before completion which would give the seller priority over the rights of the lender.
Importantly, the Court of Appeal at the very end of its judgment gave some tips to conveyancers dealing with transactions of this kind. The problem which arose here could have been avoided if the contracts for sale had given details of the entire contractual deal between the appellant sellers and the purchasers.
• This would have put the lenders on notice of the contractual arrangements that were to operate in relation to the sellers’ occupation after completion.
• The lenders’ solicitors would then have been bound to report those arrangements to the lenders, who could then have decided whether or not to lend on those terms.
• The omission of the relevant details in the contract seemed on the face of it to be inconsistent with proper conveyancing practice.
There are approximately another 90 cases where lenders have commenced possession proceedings against occupiers who sold their homes under this scheme and a substantial number of other cases where lenders have been waiting for this decision.
There are also other schemes run by different sale and rent-back businesses where the facts are broadly the same, although there might be significant differences. Even though the law has now been clarified by this decision, it is important that you take advice on the special facts of your own case, not least to examine whether there might be a case against the solicitor who acted for you on the sale.
This article should not be taken as a full statement of the law. It should be regarded purely as guidance and is no substitute for professional advice. No responsibility for loss occasioned as a result of any person acting or refraining from acting can be accepted by Wiseman Lee LLP. © Wiseman Lee LLP 2012