Dhillon v Orchard: Court of Appeal rules section 26 FSMA rights cannot bind successors in title

The Court of Appeal has held in Daljit Kaur Dhillon v Jeffrey Orchard & Ann Orchard [2026] EWCA Civ 346 that the right to recover money or property under section 26(2) of the Financial Services and Markets Act 2000 ("FSMA") cannot be asserted against a successor in title to the original contractual counterparty. In doing so, the Court preferred the analysis of Hamblen J in InnovatorOne [2012] EWHC 1321 (Comm) over the contrary reasoning of Miles J below.

The Orchards had in 2010 transferred their home at 56a Claudian Way, Grays, Thurrock to Red 2 Black Properties Limited ("R2BL") under a sale and rent back agreement, remaining in occupation as assured shorthold tenants. R2BL was not authorised under FSMA to carry on such regulated activity, meaning the agreement was unenforceable pursuant to section 26. In 2013, the appellant Daljit Dhillon — who by then held all shares in R2BL following her divorce from its founder — purchased the property from R2BL for approximately £115,000. When Ms Dhillon subsequently claimed possession on the basis of rent arrears, the Orchards counterclaimed, arguing their section 26 rights constituted a "mere equity" binding on Ms Dhillon as an overriding interest under the Land Registration Act 2002, given their continuing actual occupation.

Miles J allowed this argument on appeal from His Honour Judge Duddridge, holding that the rights of recovery under section 26 were analogous to those arising from rescission for fraud or undue influence — capable of binding third parties subject to the ordinary rules of priority. The consequences were reserved for a further hearing.

Lord Justice Newey, with whom Lady Justice Asplin and Lord Justice Snowden agreed, allowed Ms Dhillon's appeal. Returning to the statutory text, he identified four interlocking reasons why section 26(2) rights cannot extend to successors in title.

First, section 28(8) provides that where property transferred under an agreement has "passed to a third party", references to that property in sections 26, 27, and 28 are to be read as references to its value at the time of transfer. That substitution indicates Parliament contemplated the property remedy dissolving into a monetary claim once third-party hands are involved — not that the property itself remains recoverable. Mr Howarth KC's submission that section 28(8) applied only where property had passed to a third party "absolutely" found no support in the statutory language.

Secondly, the relief provisions in section 28(4)–(6) direct the court to consider whether the person carrying on the regulated activity reasonably believed he was not contravening the general prohibition. Parliament gave no guidance on the relevance of a successor in title's knowledge or notice — an omission difficult to explain had it contemplated claims against third parties.

Thirdly, section 28(7) requires the innocent party, on recovering property, to repay money and return property received under the agreement. The language of repayment and return presupposes dealings between the original contracting parties; it would be inapt in relation to a successor in title who was never a party to the transaction.

Fourthly, and more broadly, extending the right of recovery to successors in title would require FSMA to address tracing, bona fide purchase defences, and the treatment of mixed funds — none of which it does. The absence of any such framework is inconsistent with a legislative intention to bind third parties.

The judgement confirms that a person who acquires property from an entity that carried on an unregulated sale and rent back activity does not thereby inherit the original seller's rights of recovery. Parties aggrieved by breaches of the general prohibition in section 19 FSMA are confined to their monetary remedies against the original counterparty, or may look to the FCA's powers under section 382 where large-scale contraventions are involved. The Court also expressed — albeit on a basis it acknowledged was unnecessary to decide — that Miles J had been wrong to permit the Orchards to advance their section 26 argument for the first time on appeal, given the absence of any adequate costs protection for Ms Dhillon should the argument ultimately fail.

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