In a recent decision the Court of Appeal has ruled that mortgage lenders take priority over the seller/occupiers in sale and rent-back transactions. The decision has been eagerly awaited as there are many cases which have been anxious to know how the land lies legally.
The appellant barrister had tried to argue the transactions that had taken place were equity release schemes rather than sales. If this had been accepted it may have afforded the sellers some element of protection. However the court considered this argument did not hold water. Equity release schemes are arrangements between a lender and the owner who remains the legal owner and the amount borrowed takes effect as a mortgage.
The transactions which were the subject of the court cases were sales and rent back agreements where the two halves of the transaction had been very carefully separated.
The sellers of the properties considered they had been dealing with a company which appeared to specialise in situations where the owners were having difficulty with their mortgage payments. The Company offered a solution whereby they would buy the properties at a discount for an amount sufficient to pay off the sellers’ mortgages but with the promise of a lease back so the seller could remain in their property for an extended period of time.
However the properties were in fact bought by individuals who were invariably employees or otherwise connected with the people behind the Company, who had obtained in their own names, often via specialist brokers, buy-to-let loans to fund the purchases. The new lenders had no knowledge of the lease back arrangements. They were under the impression they were lending to individual borrowers purchasing the properties who were then to let them out to tenants not connected to the transaction.
The problem arose when the loans defaulted. There was nothing at all in the sales contracts or in the transfer to the new owners which would or should have put the new lenders on notice of any arrangement involving previous owners.
It was only when the loans went into default, the lenders became aware for the first time that the tenants in occupation were not tenants in accordance with the type of letting which was permitted under the provisions of buy to let mortgages, ie an assured short hold tenancy of not more than one year. They were in occupation under non-standard tenancies which the new owners should not have entered into with the previous owners.
After the new owners failed to pay the mortgages the lenders sought vacant possession of the properties. The Lenders had to include the tenants in occupation of the properties as defendants to the proceedings. In their defence to possession, the tenants argued they had interests which should override and take priority over the lenders’ entitlement to take possession.
In dismissing the appeals, Lord Justice Etherton said: “It is impossible not to feel the greatest sympathy for the situation in which the appellant sellers find themselves. “Having entered into a transaction, in complete good faith, which they reasonably thought would secure both their financial situation and the continuing occupation of their home, they potentially find themselves with no security in respect of either, and, indeed, in a worse situation than if they had never entered into the transaction.”
It was recognised by everyone that this is a case between injured parties – the lenders and the hapless sellers. There was an attempt on the part of the appellants to suggest that the courts should have regard to the substance rather than the form of the transaction giving rise to the competing interests. They had asked the court to take a different approach in light of changed social and economic conditions caused by people living longer and so needing to release equity in their homes to stay in them.
The judge has sympathy for the appellants but “the Court of Appeal dismissed the suggestion that, as commercial entities, the lenders should take on the burden of making appropriate inquiries because they are in much better position than the sellers to take the risk of fraud or carelessness in such scenarios.”
No matter how difficult a borrower is having with mortgage payments such a scheme as described above is not the solution as invariably the tenancy being granted will provide only up to a year’s security. It is difficult to understand why the sellers’ solicitors allowed their clients to enter into transactions which would have provided their clients with very little protection.
Buyers intending to lease back to the owners now have to be registered with the Financial Services Authority (FSA).
Should you find you are being asked to enter into such and arrangement please contact our property experts who will be happy to advise you. |
