Supreme Court rules on sale-and-rent-back mortgage litigation

Hundreds of sale-and-rent-back disputes have been decided by a test case in the Supreme Court.

The Supreme Court has unanimously dismissed the appeal from Scott in Southern Pacific Mortgage Limited v Scott. The news will be welcomed by lenders who have been waiting for the court's ruling.

The case involved North East Property Buyers (NEPB), a group of individuals who targeted a sale-and-rent-back scheme at home owners facing difficulties with their mortgage repayments.

In 2005, the appellant, Mrs Scott, sold her home to an investor, Ms Wilkinson, who was linked with the NEPB scheme, at a considerable undervalue. In return, Scott gave up a significant portion of the sale proceeds in return for a promise that she could stay as a tenant at a low rent for life, with her son inheriting the tenancy on her death.

However, the investor's purchase was funded by a buy-to-let mortgage from Southern Pacific, which was not aware of the arrangement with Scott. The tenancy agreement was therefore in breach of the terms of the mortgage.

When mortgage payments stopped, Southern Pacific looked to repossess the property at which time a dispute arose over whether Scott had an interest in the property that enabled her to stay in occupation.

The issue arising in the appeal was whether the home owners have any rights entitling them to remain in occupation of their homes, in addition to any claims they may have against the purchasers who may have defrauded them and their legal advisers.

Fractional value

Paul Heeley, partner at TLT, the firm representing Southern Pacific, said: "This test case put three hundred years of conveyancing law and practice in the dock. If the judgment had gone against Southern Pacific, lenders would have found themselves with hundreds of properties on their books that they could sell for only a fraction of their true value. This is because tenants would be entitled to stay under what often were long-term, low-rent tenancies that lenders weren't aware of when they agreed to lend on the properties."

Heeley continued: "The value of the property is the lenders' security for the money they lend. In this case, that security was severely impacted because of the type of tenancy Mrs Scott was claiming she had. If Mrs Scott's legal arguments had succeeded, Southern Pacific would not have been able to recover all of the money they had lent on the property and, more widely, the risk lenders face when deciding to lend would have dramatically increased. That would almost certainly have affected the cost and availability of new residential mortgages, and at a time when a healthy and stable housing market is crucial to the wider UK economy."

Heeley said buy-to-let borrowers must be "upfront and honest" with the lender on their mortgage application form or they risk putting themselves and their tenants at risk.

"Also, for property owners being offered a sale-and-rent back scheme that solves their financial problems, if it sounds too good to be true, it probably is," he added. "Another consequence of this decision is that professional negligence claims against solicitors and valuers involved in sale-and-rent-back schemes are possible where they have not been completely up-front when giving advice."

John van der Luit-Drummond is legal reporter for Solicitors Journal