Cook v The Mortgage Business Plc

These appeals concern arrangements, described by the appellants as equity release schemes, by which the registered owners of registered land sell their homes to purchasers, who promise the vendors the right to remain in their homes after the sale. The financial terms of the transactions reflect such a promise, typically by the purchase price being less than the market value or the payment back to the purchaser of part of the purchase price. The attraction for the vendor is that the sale raises sufficient money to pay mortgage or other debt but the vendor can continue to occupy his or her home. If the purchaser raises all or part of the purchase price on mortgage, and then defaults, the issue arises whether the mortgagee’s right to possession has priority over, or is subject to, any entitlement of the vendor to continue in occupation where the right asserted by the vendor is prohibited by the mortgage.

These appeals are brought by such vendors from orders for possession made on 19 November 2010 by His Honour Judge Behrens, sitting as a High Court Judge, in actions for possession instituted by mortgagees where such purchasers have defaulted in their mortgage payments. The Judge made the orders for possession following his determination of three preliminary issues in nine test cases. In short, he considered that the effect of the Land Registration Act 2002 (“the LRA”) and case law, including in particular Abbey National Building Society v Cann [1991] 1 AC 56, meant that the mortgagees’ right to enforce their security has priority over the rights of the vendors to remain in occupation of their homes and there was no legal defence to the mortgagees’ claims for possession.

The provisions of the LRA and the Law of Property Act 1925 (“the LPA 1925”) mentioned in this judgment are set out in the appendix.

It is right that I should say at the outset, as did the Judge, that it is impossible not to feel the greatest sympathy for the situation in which the appellant vendors 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. Mr Jonathan Small QC, in his able submissions on their behalf, unsurprisingly, but skilfully, concentrated part of his oral submissions on the policy issues raised by that unfortunate situation.

The appeals have been brought by only some of the unsuccessful defendants in the nine test cases determined by the Judge. The appeals in the other cases have been settled or stayed. The claimant mortgage lenders, who are the respondents in these appeals, are Mortgage Business plc and Southern Pacific Mortgage Ltd (“the respondent lenders”). In their respective proceedings they claim possession from the purchaser, as first defendant, and the occupying vendor, as the second defendant, of the relevant property.

Mortgage Express was the claimant in one of the test cases decided by the Judge. The occupying vendors in that case appealed, but subsequently withdrew their appeal. Mortgage Express has, nevertheless, participated in the remaining appeals as an interested party, by direction of the Master of the Rolls.

The Judge set out in appendix 1 to his judgment the various parties, their representation and the relevant property in each case. He set out in appendix 2 to his judgment a summary of relevant facts relating to each case. For the purpose of these appeals, it is sufficient to give the following broad and general summary which I have gratefully taken largely from the Judge’s judgment.

In each case the purchaser and mortgagor was, or is assumed to have been, a nominee for an entity called North East Property Buyers ("NEPB"). It is unclear what NEPB is or comprises. In each case the purchaser and mortgagor, although joined as the first defendant, has taken no part in the proceedings. It is said that they have disappeared.

In most cases the price paid under the sale contract was, or was assessed as, the market value but the appellant vendors paid back to NEPB a significant part of the completion money. In every case the appellant vendors allege that promises were made to them by NEPB or their agents as to their right to occupy the properties after completion. The precise nature of the promises varies from case to case. In all cases the vendor appellants contend that they were offered a tenancy of their property, but the rent payable and the length of tenancy differs from case to case. In many cases the vendors were assured that they could stay in their property for as long as they liked provided they complied with the terms of their tenancy.

In each case the purchaser applied for a loan from one or other of the respondent lenders. The application form disclosed that the property was being purchased on a "buy to let" basis and that the tenancies granted would be assured shorthold tenancies (“ASTs”) of six months’ duration. The applications were successful and secured loans were made to the purchasers.

In each case exchange of contracts between the relevant appellant vendor and the purchaser, and the completion of the contract by the execution of the transfer, and the execution of the mortgage, all took place on the same day.

Subsequent to completion NEPB did purport to grant ASTs to the appellant vendors. The period for which the AST was granted varies from case to case from 2 years to 10 years.

Neither the rights of occupation promised by the purchasers to the appellant vendors nor the ASTs granted by the purchasers were permitted by the respondent lenders’ mortgages.

The purchasers failed to pay the sums due under the mortgages. The arrears are substantial.

The appellant vendors assert that those acting for NEPB were fraudulent, but this remains uncertain.

As I have said, the present appeals are only some of the nine test cases decided by the Judge. There are apparently approximately another 90 cases where mortgagees have commenced possession proceedings against occupiers who have sold their homes to NEPB under a sale and leaseback scheme. In addition, there are a substantial number of other cases where mortgagees are awaiting the outcome of these proceedings.

The Judge ordered the determination of the following preliminary issues, which had been agreed by counsel at a case management conference:

“1.

With reference to section 29 of the Land Registration Act 2002 are any of the interests alleged by the Defendants capable of being interests affecting the estates immediately before and/or at the time of the disposition, namely the transfer and/or charge of the property in question, sufficient to be an overriding interest under paragraph 1 and/or 2 of Schedule 3 of the 2002 Act? For the avoidance of doubt this encompasses (but is not limited to) arguments arising out of Abbey National v Cann 1991] AC 56, City of London Building Society v Flegg [1988] AC 54, the Law of Property (Miscellaneous Provisions) Act 1989 and section 63 of the Law of Property Act 1925.

2.

Can any of the tenancy agreements alleged by the Defendants have obtained priority over the Claimants' charges under section 29(4) of the 2002 Act if (a) the Claimants did not have the benefit of a priority search at the relevant time or (b) if the Claimants did have the benefit of such a search?

3.

Is it possible for the Claimants' priority to be adversely affected by notice of such promises as were made and the circumstances of the transaction by virtue of their agent's knowledge:

a)

If passed on, or

b)

If not passed on to the Claimant mortgagee?”

The Judge answered each of those preliminary issues in the negative. The Judge’s reasons in his clear and careful judgment may be summarised very briefly as follows.

As to the first preliminary issue, the Judge considered that, insofar as the right of the vendors to remain in occupation after the sale arose on completion, it follows from the decisions in Cann, Nationwide v Ahmed [1995] 70 P&CR 381, Whale v Viasystems [2002] EWCA Civ 480, and Hardy v Fowle [2007] EWHC 2423 (Ch) that the mortgagees have priority because there was no moment of time after the contracts for sale were exchanged when the legal title to each property vested in the purchaser free from the mortgage (“the Cann principle”). He declined to follow the contrary view of His Honour Judge Worster in Redstone v Welch & Jackson [2009] EG 98.

The Judge also rejected the argument of the appellant vendors that the purchasers’ assurances about the vendors’ entitlement to remain in occupation gave rise to an equity or an equitable interest on exchange of contracts and so was an overriding interest with priority over the rights of the respondent lenders. He gave three reasons. He said ([53]) that Ahmed is authority that the Cann principle applies where contracts are exchanged on the same day as completion and the execution of the mortgage. He also considered ([54]) that prior to completion the occupiers’ equitable rights were at best personal and not proprietary and so could not give rise to overriding interests. He also held ([55]) that, by virtue of the LPA 1925 s.63 the transfers executed by the vendors would have transferred any interest that they might have had in their property.

As to the second preliminary issue, the Judge rejected ([61] to [62]) the vendors’ argument that the combined effect of sections 23, 24, 27 and 29(4) of the LRA was that the grant of a lease of 7 years or less by the purchaser took effect as if the disposition was registered at the time of the grant, and, because that was before the date of registration of the relevant mortgage in every case, it had priority over the mortgage. He held that, prior to the registration of the purchaser as proprietor, any lease granted by the purchaser only took effect in equity, but section 29(4) only applies to legal leases. He further held ([63]) that, even if he was wrong about that, he would have held that LRA s. 72 applies just as much to leases within section 29(4) as in other cases so as to give priority to any mortgagee who makes an application for registration within the priority period conferred by the official search.

As to the third preliminary issue, the Judge referred to the concession made by Mr Small in his oral submissions that in registered conveyancing priorities are governed by the provisions of the LRA and, save as provided by the LRA, the question of knowledge is irrelevant. The Judge considered that the concession was supported by observations of Lord Wilberforce in Williams & Glyn’s Bank v Boland [1981] AC 487, 584 A-D.

At the hearing on 19 November 2010, when the Judge handed down his judgment, counsel for the respondent lenders submitted that, in the light of the Judge’s negative answers to all three preliminary issues, the Judge should make orders for possession without any further trial. Junior counsel for the appellant vendors identified three further issues which arguably merited a trial. One, which was not pleaded, concerned the possible application of Article 8 of the European Convention on Human Rights. The Judge said it was not something he should take into account since it was not a pleaded defence, no decision had been made whether or not to plead it, and the facts were very different from any other case in which the application of Article 8 had been endorsed. The two other potential issues relied upon by counsel for the vendors were already pleaded. One was the mortgagees’ knowledge of the tenancies. The Judge said that was covered by his answer to the third preliminary issue. The other was that the transfer as between the vendor and the purchaser could be set aside. The Judge said that was covered by his answer to the first preliminary issue.

The Judge came to the conclusion, therefore, that there was nothing in any of the defences and, in cases where possession orders had not already been made, it was appropriate for there to be possession orders.

The appellant vendors seek orders on these appeals setting aside the Judge’s order in each case and that, among other things, the answers to the first and second preliminary issues are affirmative, and that the appellants’ claims and counterclaims be remitted for trial.

We have had the benefit of detailed written and oral submissions on behalf of the appellant vendors, the respondent lenders and the interested party. I shall consider in turn the criticisms made by the appellant vendors of the Judge’s decision on the first and second preliminary issues and then his conclusion that there was no defence to the claims and nothing to warrant any of the cases proceeding to trial.

The vendor appellants claim that from the moment of exchange of contracts they each had, by virtue of the assurances by the purchasers as to the vendors’ right of occupation after completion, an equity in their property (whether by virtue of an estoppel or a constructive trust or otherwise) beyond and in addition to their registered freehold interest. They say that such an equity was an overriding interest within paragraph 2 of Schedule 3 to the LRA and so binding on the respondent lenders by virtue of LRA s. 29(2)(a)(ii).

An overriding interest within paragraph 2 of Schedule 3 to the LRA must be a proprietary right adversely affecting the title: LRA s.132(3)(b). The vendor appellants submit that the Judge was wrong to hold that their equity arising out of the purchasers’ assurances was at best personal and not proprietary. Mr Small advanced various arguments in support of that submission. His starting point was that the appellant vendors were induced to exchange contracts for sale on the basis of the purchasers’ promises that they would be entitled to remain in occupation of their properties after completion, and, by entering into the contracts for sale, the appellant vendors acted to their detriment. It is common ground that, for the purposes of the preliminary issues, the facts are to be assumed to be capable of giving rise, in favour of the appellant vendors, to a proprietary estoppel or a constructive trust or an equity to set aside the transfers for fraud. In support of such an estoppel or equity giving rise to an interest in the relevant property, he referred to LRA s. 116. That section declares that, for the avoidance of doubt, in relation to registered land, an equity by estoppel and a mere equity has effect from the time the equity arises as an interest capable of binding successors in title.

Mr Small elaborated the point. He said that, on exchange of contracts for the sale of property, part of the beneficial interest in the property passes to the purchaser and part is retained by the vendor. He submitted that there is no legal impediment to a vendor acquiring rights in the property in equity at that stage binding on the purchaser. He mentioned, by way of analogy, a contract by a purchaser in favour of a sub-purchaser. Mr Small submitted that this effects a disposition of the purchaser’s equitable interest, even though the latter is a conditional beneficial interest contingent on payment of the purchase price, and that it creates an estate contract registrable (in the case of unregistered land) under the Land Charges Act 1972 against the estate owner, and not the purchaser. In the case of registered land, such a sub-contract can be protected by the registration of a notice under LRA s. 32. He said the sub-contract gives the sub-purchaser an equitable interest in the property itself. In that connection the appellant vendors rely upon observations of Lord Cairns in Shaw v Foster (1871-72) LR 5HL 321 at page 338 and the decision and reasoning of Foster J in Greaves Organisation Ltd v Stanhope Gate Property Co Ltd 228 EG 725. The appellant vendors contend that, by analogy, the assurances by the purchaser in the cases under consideration on these appeals gave rise to a corresponding interest in the property. In effect, upon exchange of contracts, the vendors obtained a sub-equity in the property.

By way of further analogy, Mr Small referred to the vendor’s lien. Such a lien arises on exchange of contracts. It was explained as follows by Millett LJ (with whom the other members of the Court of Appeal agreed) in Barclays Bank plc v Estates & Commercial Ltd [1997] 1 WLR 415 at 419H-420D:

“As soon as a binding contract for sale of land is entered into the vendor has a lien on the property for the purchase money and a right to remain in possession of the property until payment is made. The lien does not arise on completion but on exchange of contracts. It is discharged on completion to the extent that the purchase money is paid: In re Birmingham, decd.; Savage v. Stannard [1959] Ch. 523, cited with approval in London and Cheshire Insurance Co. Ltd. v. Laplagrene Property Co. Ltd. [1971] Ch. 499, 514. Even if the vendor executes an outright conveyance of the legal estate in favour of the purchaser and delivers the title deeds to him, he still retains an equitable lien on the property to secure the payment of any part of the purchase money which remains unpaid. The lien is not excluded by the fact that the conveyance contains an express receipt for the purchase money.

The lien arises by operation of law and independently of the agreement between the parties. It does not depend in any way upon the parties' subjective intentions. It is excluded where its retention would be inconsistent with the provisions of the contract for sale or with the true nature of the transaction as disclosed by the documents. It is also excluded where, on completion, the vendor receives all that he bargained for: Capital Finance Co. Ltd. v. Stokes [1969] 1 Ch. 261 and Congresbury Motors Ltd. v. Anglo-Belge Finance Co. Ltd. [1971] Ch. 81. In each of those cases the vendor took a legal charge to secure payment. The unpaid vendor's lien was held to be excluded notwithstanding that the charge later became void for want of registration.”

Mr Small also referred to Coventry Permanent Economic Building Society v Jones [1951] 1 All ER 901, in which Harman J described the grant of a tenancy by a person who had contracted to purchase land, but had not yet completed, as conferring on the prospective tenant an equitable interest.

Mr Small also referred to, and relied upon, Sargaison v Roberts [1969] 3 All ER 1072. That was a case concerning a taxpayer’s entitlement to tax allowances under section 314 of the Income Tax Act 1952. The question was whether, for the purposes of the legislation, a transfer by the taxpayer into trust of a farm and the simultaneous grant by the trustees to him of a lease resulted in the whole of the taxpayer’s interest in the land being transferred to another person (which would have disentitled him to his tax allowance) or operated to reduce his interest from ownership of a freehold to ownership of a lease. Megarry J took the latter view. He said that the taxpayer’s interest had uno ictu merely been reduced from ownership of the freehold to ownership of a lease. By way of analogy, the appellant vendors’ case is that the sale and leaseback transaction under consideration in these appeals was to transfer their homes subject to and diminished by the estoppel or equity in their favour.

In repudiating the appellant vendors’ argument on this issue, the skeleton arguments for the respondent lenders and for the interested party, and the oral submissions of Mr Jonathan Seitler QC, for the respondent lenders, subjected the legal interest of a purchaser under an uncompleted contract for the sale of land to a close and penetrating analysis. They included reference to Lord Walker’s description of the effect of a contract for the sale of land on the beneficial interest in Jerome v Kelly [2004] UKHL 25, [2004] 1 WLR 1409, at [32], and an analysis of the provisions of the LRA in support of the respondent lenders’ proposition that an overriding interest can only be created by a legal owner. Among other detailed points made on behalf of the respondent lenders on this issue, Mr Seitler observed that during the period between exchange of contracts and completion the vendor holds the property on a conditional trust for the purchaser, but the vendor alone is beneficially entitled to the profits from the land and can mortgage it, and the purchaser has no right to enter upon it. Mr Seitler submitted that it is inconsistent with that state of affairs to hold that the purchaser can, prior to completion, deal with his interest in such a way as to confer an equitable interest in the property on a third person, let alone the vendor. Mr Seitler did not accept that a sub-purchaser has any equitable interest in the land prior to completion of the head contract. He said that Lord Oliver’s comments in Cann (at 89C/D) (reflected also in Lord Jauncey’s observation in Cann at 95H) support the respondent lenders’ case that any dealings in favour of third parties by the purchaser under an uncompleted contract for the sale only give rise to personal rights against the purchaser. He also said that both principle and case law show that a proprietary estoppel can only arise when the person making the relevant representation or assurance has acquired the legal estate. He further submitted that the vendor’s lien has to be seen as a particular feature arising by operation of law and not indicative of the ability of the purchaser to create and transfer equitable interests prior to completion. We also heard submissions from counsel about the nature of the interest of beneficiaries under a sub-trust.

I found the submissions on behalf of the respondent lenders on this aspect broadly attractive, but it is not necessary to express a concluded view about them. In my view, this part of the case has been addressed in the skeleton arguments and most of the oral submissions on too technical a basis. It seems to me that the correct approach is, first, to analyse the true commercial and legal nature of the transactions between the appellant vendors and the purchasers. Objectively appraised, was each transaction, as Mr Small would portray it, effectively an agreement for sale subject to a reservation, or was it, as Miss Nicole Sandells, counsel for Mortgage Express, ably argued, two separate transactions, one for the sale of the freehold and one for a leaseback to the vendor upon completion? The way the documentation was prepared points firmly in favour of the latter.

A notable feature of each transaction is that no reference was made in any of the contracts for sale to a leaseback to the vendors. The contract for sale that we were shown by way of an example provided expressly that the property was sold with full title guarantee and with vacant possession. There was a blank space in the special conditions under the heading “The Property is sold subject to the following Leases or Tenancies:”. We were told by Mr Small in his oral submissions in reply that we should not assume that every contract for sale of the appellant vendors was in precisely the same form, but he acknowledged that we could assume that none of them made any reference to the grant to the vendors of a lease on completion. The clear impression created by the contracts, therefore, was that the vendors would be selling without reserving any beneficial interests or other rights in the property. That was how any third party, including mortgagees lending money to fund the purchase, would be entitled to view the matter: comp. Abigail v Lapin [1934] AC 491. The contracts disclosed no basis for a qualified report on title to the respondent lenders by their solicitors which would have alerted the respondent lenders to the possibility that the appellant vendors expected to remain in possession after completion or that the purchasers would obtain anything less than the entire legal and beneficial interest in the properties.

In those circumstances, however the appellant vendors put their case, whether on estoppel or constructive trust or otherwise, no equitable interest or equivalent equity could have arisen in their favour prior to completion. That is what distinguishes these cases from Sargaison, and also from the situation where there is a vendor’s lien. The vendor’s lien, which arises as a matter of law on exchange of contracts, effectively cuts down or diminishes the beneficial interest contracted to be sold. Having regard to the contracts for sale in the present case, there is no analogy.

Furthermore, and in any event, I agree with the Judge’s decision that Ahmed is authority that the Cann principle, which I discuss later, applies in the present cases since in all of them the contract for sale was exchanged, and the transfer and mortgage were executed, on the same day. The consequence is that, even if an equity arose in favour of the appellant vendors immediately upon exchange of contracts in consequence of the assurances made by the purchasers, there was no moment of time when the freehold acquired by the purchaser was free from the mortgage but subject to the equity.

In Ahmed the first defendant agreed to purchase a business from the second defendant for £160,000. £80,000 was raised by way of a secured loan from the plaintiffs and was paid to the second defendant. The balance of £80,000 was left outstanding and secured by way of a second charge against the property. The arrangements for the sale and purchase of the business and the property were embodied in an agreement dated June 1, 1990. The agreement expressly contemplated that the plaintiffs' legal charge would rank in priority to the second defendant's charge on the property. Clause 6 of the agreement provided that the second defendant was to retain the use of the property until the whole of the principal money and interest due under the agreement had been paid. The transfer of the property and the mortgage deed were also dated June 1, 1990. The first defendant failed to pay the second defendant the sums due under the agreement, and also fell into arrears on the mortgage repayments. In proceedings for possession by the plaintiff mortgagees the second defendant defended on the grounds that the plaintiffs’ first charge was subject to the second defendant's overriding interest arising from his unpaid vendor’s lien and also from his right under clause 6 to remain in occupation until the outstanding purchase money and interest had been paid.

The Court of Appeal dismissed the second defendant’s appeal from the trial judge’s order for possession. Aldous LJ, with whom the other members of the Court agreed, said that it was indisputable that the plaintiff’s legal charge had priority over the second defendant’s second charge, and that, on the facts, the second defendant did not have a vendor’s lien, and that the right of occupation under clause 6 of the agreement was only a personal, contractual right and not an interest in the land. Aldous LJ then said as follows at page 389:

“The submission also fails because the charges, the agreement and the transfer were all signed on the same day namely June 1. Thus, his right to occupation under clause 6 did not accrue prior to the creation of the respondent's charge. In Abbey National Building Society v. Cann the House of Lords decided that the relevant date for determining the existence of an overriding interest was the date of registration of the estate affected. In this case that date was August 3, 1990. They went on to hold that to acquire an overriding interest against a chargee by virtue of occupation, the person claiming the interest had to have been in actual occupation at the time of the creation of the legal estate. In this case that was June 1, 1990. They concluded that when a purchaser relied on a building society, such as the respondent, to enable completion, the transactions involved were one indivisible transaction and, therefore, there was no scintilla temporis during which the right to occupation vested free of charge.

The same reasoning is applicable to the facts of this case. On June 1, the contract, the transfer and the legal charges were completed. They formed an indivisible transaction and there was no scintilla temporis during which any right to occupation under clause 6 of the agreement vested in the appellant which was free of the respondent's charge. Thus, the right given by clause 6 did not provide an overriding interest … even if the right was a proprietary right.”

The appellant vendors seek to distinguish Ahmed on various grounds. Mr Small emphasised the findings that there was no vendor’s lien, and that the security for the outstanding sums due to the second defendant was intended to rank and did rank after the plaintiffs’ charge, and that the second defendant’s clause 6 rights did not give rise to an interest in land. He also submitted that, in the light of those findings, the observations of Aldous LJ about the application of Cann on the facts were not part of the necessary reasoning and so not binding precedent. I do not agree. Aldous LJ’s decision on the application of Cann was expressly stated as an alternative ground for dismissing the appeal (“The submission also fails because …”). In any event, I agree with Aldous LJ’s approach. Where, as in Ahmed and in the cases under consideration on this appeal, the contract is made and completed at broadly the same time as the mortgage is executed, it is too technical and not realistic to separate out the contract, on the one hand, and the transfer and mortgage, on the other hand, as distinct and separate transactions. I do not consider there are any legitimate grounds for distinguishing Ahmed from the present cases on this point.

The appellant vendors criticise the Judge’s finding that the effect of section 63 of the LPA 1925 was that the transfers executed by the vendors would have transferred the entire interest that they had in their respective properties. That issue does not arise in view of my conclusion that no equity capable of subsisting as a proprietary interest, and hence as an overriding interest within Schedule 3 of the LRA, could have arisen in the present cases prior to completion as a result of the assurances given by the purchasers about the vendors’ rights to continue in occupation after completion.

The appellant vendors contend that, even if any equitable interest or equity in their favour as to their right to remain in occupation of their homes arose only on completion, none of the cases cited by the Judge is binding authority that, on the facts of the present cases, the right of the respondent lenders to enforce their security has priority over the right of the appellant vendors to remain in occupation of their homes.

The principal issue on this part of the appeal is whether Cann is binding authority in favour of the priority of the respondent lenders’ mortgages, that is to say whether the Cann principle applies on the particular facts of the present cases.

In Cann the first defendant, Mr Cann, purchased a house, which was registered land, with a mortgage from the plaintiff building society. In his application for the mortgage, he had stated that the property was being purchased for his own sole occupation. His intention, however, was that the property should be occupied not by himself but by his mother, the second defendant (“Mrs Cann”), and a man whom she subsequently married, the third defendant. Completion of the purchase and of the mortgage took place on the same day. Mr Cann was registered at the Land Registry as sole proprietor of the property and the society were registered as proprietors of the charge on the same day. Mr Cann subsequently defaulted in his payments to the society, and the society commenced proceedings for possession against him and against Mrs Cann and the third defendant. Mr Cann did not defend the proceedings and took no part in them. The defence of Mrs Cann and the third defendant was that, by reason of a contribution made by Mrs Cann to the purchase of a property previously bought by Mr Cann and herself and an assurance given by Mr Cann to her that she would always have a roof over her head, she had an equitable interest in the property that, by virtue of her actual occupation, had taken priority over the society's charge and had been binding on the society as an overriding interest pursuant to the provisions of sections 23(1) and 70(1)(g) of the Land Registration Act 1925 (corresponding, so far as material, to the provisions now in LRA s. 29(2)(a)(ii) and para. 2 of Schedule 3). The trial judge made an order for possession, and the appeals of Mrs Cann and the third defendant to the Court of Appeal and then the House of Lords were dismissed.

The House of Lords, among other things, rejected the argument that, if Mrs Cann had an equitable interest which arose prior to or on completion, her interest had priority to the society’s charge because there was a moment in time – a scintilla temporis – between the transfer of the title of the house to Mr Cann and the execution of the society’s charge, during which the legal title to the house vested in Mr Cann free from any charge and “fed” the estoppel in favour of Mrs Cann; so that, if she had been in actual occupation at that time, her interest would have been an overriding interest having priority over the society’s subsequent charge.

In advancing that argument, Mrs Cann and the third defendant relied upon the decision of the Court of Appeal in Church of England Building Society v Piskor [1954] Ch 553. In that case the Court of Appeal held that weekly tenancies granted by the purchaser of a property before completion (and therefore necessarily equitable) were binding on the building society whose money the purchaser had used to complete and in whose favour a charge (containing provisions against leasing by the chargor) was executed at the same time as completion of the purchase. The court held that, default having been made in payments due under the society’s charge, the society were not entitled to possession against the tenants in possession. The court accepted the argument of the tenants that they had acquired their tenancies by estoppel which was “fed” by the acquisition of the legal estate, thereby converting their tenancies into legal tenancies binding on the society. The court rejected the argument of the society that the conveyance and the charge were in reality one single transaction with the result that the purchaser’s legal estate was, from the outset, subject to the society’s charge and so could not be available to feed the estoppel free from it. The reasoning and decision in two earlier cases, In re Connolly Brothers Ltd (No. 2) [1912] 2 Ch 25 and Coventry Permanent Economic Building Society v Jones, and in a subsequent Privy Council case, Security Trust Co v Royal Bank of Canada [1976] AC 503, were on the face of it inconsistent with Piskor.

The principal speeches in Cann were given by Lord Oliver and Lord Jauncey, with whom the other members of the judicial committee agreed. On the question of priorities, Lord Oliver said as follows at pages 92F-93C:

“Of course, as a matter of legal theory, a person cannot charge a legal estate that he does not have, so that there is an attractive legal logic in the ratio in Piskor's case. Nevertheless, I cannot help feeling that it flies in the face of reality. The reality is that, in the vast majority of cases, the acquisition of the legal estate and the charge are not only precisely simultaneous but indissolubly bound together. The acquisition of the legal estate is entirely dependent upon the provision of funds which will have been provided before the conveyance can take effect and which are provided only against an agreement that the estate will be charged to secure them. Indeed, in many, if not most, cases of building society mortgages, there will have been, as there was in this case, a formal offer and acceptance of an advance which will ripen into a specifically enforceable agreement immediately the funds are advanced which will normally be a day or more before completion. In many, if not most, cases, the charge itself will have been executed before the execution, let alone the exchange, of the conveyance or transfer of the property. This is given particular point in the case of registered land where the vesting of the estate is made to depend upon registration, for it may well be that the transfer and the charge will be lodged for registration on different days so that the charge, when registered, may actually take effect from a date prior in time to the date from which the registration of the transfer takes effect … The reality is that the purchaser of land who relies upon a building society or bank loan for the completion of his purchase never in fact acquires anything but an equity of redemption, for the land is, from the very inception, charged with the amount of the loan without which it could never have been transferred at all and it was never intended that it should be otherwise. The 'scintilla temporis' is no more than a legal artifice and, for my part, I would adopt the reasoning of the Court of Appeal in In re Connolly Brothers Ltd. (No. 2) [1912] 2 Ch. 25 and of Harman J. in Coventry Permanent Economic Building Society v. Jones [1951] 1 All E.R. 901and hold that Piskor's case was wrongly decided. It follows, in my judgment, that Mrs. Cann can derive no assistance from this line of argument.”

Lord Jauncey said as follows at pages 101F to 102C:

“It is of course correct as a matter of strict legal analysis that a purchaser of property cannot grant a mortgage over it until the legal estate has vested in him. The question however is whether having borrowed money in order to complete the purchase against an undertaking to grant security for the loan over the property the purchaser is, for a moment of time, in a position to deal with the legal estate as though the mortgagee had no interest therein. In re Connolly, Coventry Permanent Economic Building Society v. Jones [1951] 1 All E.R. 901 and the Security Trust Co. case say that he is not in such a position recognising, in my view, the realities of the situation. Piskor's case says that he is, thereby ignoring any interest which the mortgagee may have prior to completion of the purchase. Nevertheless in each of the four cases the purchase was dependent upon the loan and I find it impossible to see any material distinction between the circumstances obtaining in the three former cases and those obtaining in Piskor's case. In my view a purchaser who can only complete the transaction by borrowing money for the security of which he is contractually bound to grant a mortgage to the lender eo instante with the execution of the conveyance in his favour cannot in reality ever be said to have acquired even for a scintilla temporis the unencumbered fee simple or leasehold interest in land whereby he could grant interests having priority over the mortgage or the estoppel in favour of prior grantees could be fed with similar results. Since no one can grant what he does not have it follows that such a purchaser could never grant an interest which was not subject to the limitations on his own interest. In so far as Piskor decided that such a purchaser could be vested for a moment of time in the unencumbered freehold or leasehold estate with the consequences to which I have just referred, I consider that it was wrongly decided. Conversely I consider that the decision of Harman J. in the Coventry Permanent Economic Building Society case was correct. ”

Mr Small accepted that the decision of the House of Lords in Cann was policy driven. He argued forcefully that it could and should be distinguished from the cases under consideration of these appeals on factual, legal and policy grounds. He correctly pointed out that in Cann, contrary to the assertions of Mrs Cann and the third defendant, it was held that she was not in actual occupation at the time of completion and, moreover, she effectively consented to the society having priority over her interest. Mr Small also sought to distinguish Cann on the ground that Mrs Cann’s right was to a beneficial interest in the proceeds of sale of the house which was sold to fund the purchase of the new house whereas the appellant vendors in the present cases were already in the properties which were sold and then charged to the respondent lenders. Unlike them, he said, Mrs Cann was a stranger to the property acquired with the society’s money.

Mr Small referred to Whale, in which Parker LJ, with whom Aldous LJ agreed, said (at [72]) that, in the light of Cann, in the context of an issue as to priorities as between equitable interests, the court will have regard to the substance, rather than the form, of the transaction or transactions which give rise to the competing interests; and, in particular, that conveyancing technicalities must give way to considerations of commercial and practical reality. Mr Small submitted that, unlike Cann, where the “driver” of the transaction was to find a new home, the driver in the present cases, without which they could not and would not have proceeded, was the leaseback to the vendor. That was the key, he said, because it both provided the basis for the purchaser to keep part of the purchase price and was the means of securing the continued occupation by the vendor of the property.

That moved Mr Small to articulate policy considerations for a different approach to Cann. He said that the factual situation with which these appeals are concerned reflects a change in social and economic conditions that has thrown up a problem which is not uncommon (as the number of similar cases shows). He said that the new situation is created by the fact that people live longer and many have a need to release equity from their property to meet debts and living expenses and to enable them to continue to live in their homes. Unlike the situation in Cann, where the driver of the economic activity was the attempt to find and purchase a property, the driver in the situation of which these present cases are typical is the need or desire of people - usually of modest means, advancing age and limited legal knowledge and experience - to stay in possession of their homes. Moreover, Mr Small observed, persons in the position of the appellant vendors are usually reliant on the selection of solicitors to act on their behalf by the promoters of the equity release scheme.

Mr Small submitted that a commercial entity lending money on mortgage is in a much better position than such vendors to take the risk of fraud or carelessness in the execution of an equity release scheme. The onus should be on such mortgagees to make appropriate enquiries. Mr Small said that in the present social and economic conditions lenders should be aware of the possibility that vendors might take a leaseback of the property pursuant to an equity release scheme. He said lenders could easily protect themselves by making direct enquiry of occupying vendors as to what rights they thought they would have on or after completion in relation to the property.

Mr Small acknowledged that this would be a change in conveyancing practice, but he emphasised that a policy of giving priority to the rights of persons in the position of the appellant vendors over mortgage lenders funding the purchase would only be of relevance in a limited number of cases. The issue would only arise when a vendor remained in actual occupation. It would also only arise when the documentation was not properly prepared, as, for example, in the present cases where the contracts for sale made no reference to the obligation of the purchasers to grant a leaseback on completion.

Attractively as those arguments were presented, I do not accept that it is possible to distinguish the present cases from Cann on the issue of the competing priority of an equity arising on or prior to completion and a mortgage securing money used to purchase the property. I can state my reasons very shortly. Firstly, on the facts asserted by Mrs Cann (and assumed by the House of Lords to be correct for determination of the issue of principle on priority), it is difficult to see that she was in any less unfortunate a position than the vendors in the present case. She gave up occupation of her former home, in which (or technically, in the proceeds of sale of which) she had a beneficial interest in order to enable her son to purchase a new house in which he assured her she would be entitled to live so giving rise to an estoppel or equity in her favour.

Secondly, I consider that, in substance and reality, the driver of the transactions in the present cases was the vendors’ need or desire to sell their properties. Without such a sale the charges on the vendors’ properties could not be discharged and cash would not be released to them, which was the objective of the transaction. The purchase price for the properties was in each case in fact provided with the assistance of a secured loan from the respondent lenders. There was no reason for the appellant vendors to suppose that the purchase price would not be funded in the usual way by secured loans. On that footing, the principle in Cann is directly applicable.

Finally, I do not accept that, as a matter of policy, it would be appropriate to place on the respondent lenders the risk of carelessness or fraud in the carrying out of the promises or representations made to the appellant vendors because the lenders could have, and should have, made direct enquiries of the vendors. The appellant vendors were parties to their respective contracts for sale. The extent and nature of what they contracted to sell was set out in the contracts for sale and would have been amplified by enquiries before contract and requisitions pursuant to the contract. If persons in the position of the appellant vendors intend to retain any interest in their property after completion, that will or should be made clear in the contractual and associated documents, the inspection of which will form the basis of the report on title by the mortgagee’s solicitors. There can therefore be no point in a mortgagee making direct enquiries of a vendor, as opposed to other occupiers of the property. In any event, I am not entirely certain what Mr Small envisages by “direct” enquiry of the occupying vendor prior to completion. In the case of a sale of small value domestic property, the lender will often use the same solicitors as the purchaser (assuming they are on the lender’s approved panel), and those solicitors will be dealing with the vendor’s solicitors. I find it difficult to envisage that it would be appropriate, or indeed even proper, for the lender to by-pass the vendor’s solicitors and communicate direct with the vendor.

Reduced to its essentials, Mr Small’s argument on this issue was as follows. Between completion of the sale of registered land and the registration of the transfer the purchaser is, by virtue of LRA s.24 (b), entitled to exercise the owner’s powers in relation to a registered estate. Those powers include, by virtue of LRA s.23(1)(a), power to make a disposition of any kind permitted by the general law, including a lease. A lease of 7 years or less does not require to be registered before it is capable of operating at law: LRA s.27(1) and (2)(b). The effect of LRA s.29(4) is that, because a lease for 7 years or less is not a registrable disposition, the provisions in section 29(1)-(3) as to the priority of competing interests, apply on the assumption that the grant of the lease is a registrable disposition and was registered at the date of grant. Mr Small submitted that it follows from LRA ss. 28 and 29(1) and (2) that an appellant vendor’s rights under a lease for 7 years or less granted by a purchaser in the present cases have priority over a respondent lender’s rights under a subsequently registered charge, even though the charge was executed before the grant of the lease. Mr Small contended that the appellant vendors could not have obtained priority for their charges over such leases by virtue of the priority protection provided by LRA s.72. He submitted that LRA s.72(2) has no application because a lease for 7 years or less does not require to be registered and is an overriding interest within paragraph 1 of Schedule 3.

I am unclear as to the practical significance of this issue on these appeals because I understand that any tenancies of 7 years or less granted or promised to the appellant vendors will have expired. In any event, I consider that the Judge was entirely right to give a negative answer to the second preliminary issue, essentially for the reasons he succinctly gave. In short I agree that, prior to registration of the transfer, the grant of any lease by the purchaser takes effect only in equity and does not fall within LRA s.29 at all. Secondly, even if that is wrong, I do not accept that the effect of LRA s.29(4) is that a lease of 7 years or less granted by the purchaser, pending his registration, acquires priority even where the lease is granted and the charge is executed within the priority period conferred by the mortgagee’s official search with priority.

Although considerable technical arguments were addressed in the written and oral submissions to the first of those points, it seems to me to be a short matter of basic general principle. Prior to the registration of the purchaser as the proprietor, the purchaser’s interest in the property can subsist only in equity. As a matter of basic land law, an equitable owner of land cannot grant a legal interest. A person cannot grant a greater interest than he or she possesses. No doubt, for good policy reasons, the legislature could provide in sufficiently clear and precise language for a different position. I do not regard section 29 or indeed any other provision in the LRA as providing for so remarkable a position in clear and precise terms, and I cannot see any good policy reason for Parliament to do so.

We have not been shown any statement in or outside Parliament indicating that Parliament intended to change the position in this respect from that under the Land Registration Act 1925. On the contrary, the joint Law Commission and HM Land Registry Report “Land Registration For the Twenty-First Century” (LawCom No. 271) which gave rise to the LRA positively indicates no change in that respect (e.g. at para. 5.15). It seems almost inconceivable that the framers of the great 1925 corpus of land and trust legislation contemplated that the owner of an equitable estate could grant or could be deemed to have granted a legal interest.

The provisions of the LRA can perfectly well be read in an entirely conventional way as providing for the registration and deemed registration of legal interests only, and for leaving untouched the basic principle that the owner of an equitable interest cannot grant anything larger than an equitable interest. As I have said, I am not aware of any good policy reason why Parliament should have intended the grant of an equitable lease for 7 years or less to be treated differently from the grant of any other equitable interest, whether for the purposes of priority or otherwise. Nor was any policy reason suggested by Mr Small.

Even if that is wrong, I cannot see that LRA s.29 assists the appellant vendors since, as I understand it, the respondent lenders’ mortgages were all protected by being made within the priority period for the purposes of LRA s. 72. Section 29(1) sets out the rule that, where a registrable disposition of a registered estate is completed by registration, earlier interests affecting that estate are postponed unless protected. Section 29(2) provides for various circumstances in which that earlier interest can be protected, the most important of which, for present purposes, are by notice in the register and also as an overriding interest within Schedule 3. Section 29(4) specifies another exception in the case of the grant of a lease which is not required to be registered, that is, in effect, a lease of 7 years or less.

The purpose and effect of LRA s. 29(4) is simply to apply to such a lease the provisions of the LRA relating to priority as if it was a registrable disposition and was registered at the date of grant. That means, as Mr Daniel Gatty, junior counsel for the respondent lenders, pointed out, that the registration of subsequent transactions will take subject to the lease even though the lease is not registered, and whether or not it is protected by notice or is an overriding interest. Interests created earlier than the grant of the lease will, however, be binding on the tenant to the same extent, if any, as would any other earlier interest in relation to a disposition completed by registration, namely in those circumstances identified in section 29(2) and in cases where protection has been conferred by section 72.

Mr Small’s submission that section 72 is inapplicable to confer protection against a tenant under a lease of 7 years or less is plainly untenable. The express statutory assumptions in section 29(4) are that the grant of such a lease involves a registrable disposition (and so is not to be treated, for priority purposes, as an overriding interest within paragraph 1 of Schedule 3) and the grant was registered at the time it was made. Section 72 must apply on the basis of the same assumptions.

Mr Small submitted that the Judge was, in any event, wrong to make orders for possession. He described the Judge’s approach as effectively granting summary judgment without notice. He said that the appellant vendors had at least one further argument, already pleaded in their Defences, that, by virtue of the respondent lenders’ actual, constructive or imputed notice of the leases granted or intended to be granted to the purchasers, the respondent lenders were estopped from relying on the provisions of the mortgages restricting the grant of leases. Mr Small submitted that the Judge should either have directed a further preliminary issue or allowed the matter to go to trial.

I would reject this ground of appeal. In the first place, we were not referred to any authority on the point which shows that it has a real prospect of success. Secondly, not all the appellants have pleaded that the respondent lenders are to be regarded as having consented to the grant of the leases. Thirdly, I consider that the Judge was entitled to take the view, which he did, that any argument about the relevance of the lenders’ knowledge of the promises made by the purchasers as to the right of the vendors to remain in occupation after completion fell within the third preliminary issue. I do not accept Mr Small’s argument that the wording of the third preliminary issue enables the appellant vendors to distinguish between arguments about priority, on the one hand, which they accept fall within that preliminary issue, and, on the other hand, arguments about the effect of the respondent lenders’ knowledge of the tenancies or intended tenancies on the lenders’ right to obtain possession, which they say do not fall within the preliminary issue. There has been no appeal against the Judge’s negative answer to the third preliminary issue. Finally, it appears that notice was given, on behalf of the respondent lenders, prior to the hearing before the Judge on 19 November 2010 that, in the light of the preliminary issues, they considered there was nothing left in the Defences.

Before concluding this judgment, it is appropriate to emphasise once again that the problem that has arisen for the appellant vendors would have been avoided if the contracts for sale had given details of the entire contractual deal between the appellant vendors and the purchasers. If that had been done, the precise contractual arrangements that were to operate in relation to the occupation of the appellant vendors after completion would have been clearly stated and recorded. Further, the respondent lenders’ solicitors would have been bound to report those contractual arrangements to the respondent lenders, which would then have been in a position to decide whether or not to make a loan in the light of those arrangements. I do not know why details of those contractual arrangements were not contained in the contracts for sale, but, if the arrangements were intended to be binding on any third party as well as the purchaser – a matter the appellant vendors’ solicitors would have been bound to investigate and advise upon - their omission seems on the face of it plainly inconsistent with proper conveyancing practice.

For all those reasons I would dismiss these appeals.

I agree.

I also agree.