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Sale and leaseback

Overriding interests

Proprietary estoppel – pro bono costs

Redstone Mortgages Plc v Welch and Jackson
[2009] 36 EG 98

Summary

This is the first case in which the court has had to consider the enforceability of a sale and leaseback scheme, together with all the related problems concerning the precise nature of the tenancy granted; proprietary estoppel and overriding interests. It is also sets a precedent for the award of pro bono costs under the relatively new s 194 Legal Services Act 2007.

Facts

Mr and Mrs J, the beneficial co-owners of a residential property, were in financial difficulty with arrears on two existing mortgages. They responded to an advertisement in their local paper “Repossessions Stopped”, in which a firm offered to buy properties from owners in arrears, pay off the mortgages and grant tenancies enabling the occupiers to stay in their homes. The firm was run as a partnership between Mr D and Miss W.

At a meeting with Mr D, it was represented (amongst other things) that subject to Mr & Mrs J complying with the terms of the rental agreement (1) Mr & Mrs J could stay in the property for the rest of their lives; (2) that this right would extend to their 18-year old daughter; and (3) that they would be able to buy the property back at a discount of 10% off the market price.

The sequence of events was as follows:

17.10.05 Mr & Mrs J enter into tenancy agreement
28.10.05 Contracts exchanged for sale of property to Miss W
31.10.05 Completion – TR1 to Miss W and Mortgage by Miss W to lender

Mr & Mrs J remained in possession throughout.

Miss W subsequently defaulted in repayment of the mortgage monies, and the lender commenced mortgage possession proceedings. There was no issue that the lender was entitled to possession as against Miss W. The main issues concerned Mr & Mrs J’s position – the nature of their tenancy, whether and to what extent they could establish an overriding interest and whether they had the right to set aside the transaction.

Held

(1) On the facts and having regard to the provisions of s19A Housing Act 1988, the tenancy was an assured tenancy, not an assured shorthold. As a matter of construction, the tenancy agreement ‘contained a provision to the effect that the tenancy was not to be an assured shorthold tenancy’ for the purposes of Para 1, Schedule 2A, Housing Act 1988. Andrews v Cunningham [2007] EWCA Civ 762 applied.

(2) It was accepted that Mr & Mrs J had acted in reliance to their detriment upon the representations that Mr D had made and that accordingly, Mr & Mrs J were entitled to a proprietary estoppel claim against Miss W. The questions were:
  • How should the court give effect to that estoppel?

  • Does it bind the lender?
Estoppel

On the facts, the minimum equity to do justice required that Mr & Mrs J should benefit from the representations made by Mr D which included their daughter’s right to succeed them, and their right to buy at a discount. Jennings v Rice[2002] EWCA Civ 159 applied.

Effect on lender

Having regard to the requirements of paras 1 and 2, Sched 3, Land Registration Act 2002 , Mr & Mrs J’s tenancy and their proprietary estoppel claim (s116 LRA 2002) would give them sufficient interests; they were in actual occupation at all material times; it was an occupation which would have been obvious on a reasonably careful inspection of the land; and there was no failure on the part of Mr & Mrs J to disclose their rights when they might reasonably have been expected to do so.

As to the lender’s argument that where title to property is acquired with the benefit of funds provided under a mortgage, the purchaser’s title is bound by the mortgage which prevented Miss W from granting an assured tenancy to Mr & Mrs J (applying Abbey National Building Society v Cann [1991] AC 56 as applied in Whale v Viasystems Technograph Ltd [2002] EWCA Civ 480) it was held that having regard to the substance and reality of the transaction, Miss W never acquired more than a title to the property subject to Mr & Mrs J’s equitable rights, which in turn have priority over the lender’s mortgage.

The court also accepted the ‘registration gap’ argument that since Miss W could exercise owners powers of disposition including the grant of an assured tenancy, which, being for less than 7 years did not require to be registered in order to take effect in law (s27(2)(b)(i) LRA 2002), the assured tenancy could be treated as a registrable disposition of the freehold estate as if it were registered at the time of the grant (s 29 LRA 2002), and therefore took priority over the mortgage which did require to be registered in order to take effect in law.


FSA rules and guidance

New regime

Sale and rent back (full regime) consultation (CP 10/4)

The Financial Services Authority has published this Consultation Paper setting out the final rules and guidance that it proposes to apply in the sale and rent back market from 30 June 2010. Comments should be sent to the FSA by 30 April 2010. Comments may be sent by electronic submission using the form on the FSA’s Website. The principal proposals are as follows:
  • Banning exploitative advertising and high-pressure sales techniques and prohibited the use of emotive terms like ‘fast sale’, ‘mortgage rescue’ and ‘cash quickly’ in promotional literature;
  • Introducing a 14 day cooling-off period to give consumers more time to make decisions on sale and rent back;
  • Banning cold calling and prohibited firms from dropping promotional leaflets through letter boxes;
  • Confirming rules to ensure consumers have a security of tenure for a minimum of five years;
  • Introducing an affordability and appropriateness check across all sales to check that the sale and rent back deal is right for the consumer; and
  • Putting in place measures to ensure all risks are clearly signposted to the customer, via FSA literature and during the sales process.
The Council of Mortgage Lenders issued a supporting Press Release. CML Director-General Michael Coogan said:
    "We are pleased to see FSA pressing ahead with its plans to reinforce protection in an area where there has clearly been potential detriment for borrowers in arrears. Rules guaranteeing security of tenure for five years and banning cold-calling by sale-and-rent-back firms are particularly welcome.

    Borrowers in arrears should always continue discussing their problems with their lender, who will work to devise a solution depending on their individual circumstances. There are likely to be a number of options for them other than sale-and-rent-back, but it is re-assuring that borrowers who may still wish to consider this option will be better protected".



Nature of sum retained until possession

Tenancy deposit, forfeiture or unfair?

UK Housing Alliance (North West) Ltd v Francis
[2010] EWCA Civ 117

Summary

This case considered whether sums retained on a purchase and leaseback arrangement: fell within the Tenancy Deposit Scheme; were akin to forfeiture; or were unfair

Facts

F sold his house to U under a sale and leaseback scheme. On sale, he was granted an assured shorthold tenancy terminable by U only in certain circumstances; which included rent arrears. The purchase price was £125,000 of which £87,500 was payable on completion with the balance payable after 10 years and on F giving up possession. If F were to give up possession prior to that or if U terminated the tenancy in accordance with the lease, then F would lose the right to the balance.

F fell into arrears and U terminated the lease for non payment of rent. F claimed that despite the provisions of the sale agreement as to when the retention would cease to be payable: (1) the retention sum was a deposit for the purposes of the Housing Act 2004 and so U should pay a penalty being three times the deposit as it had not been protected; (2) the provision enabling U to retain the sums in the event of termination amounted to a forfeiture or penalty clause and therefore was unenforceable; and (3) that the provision was unfair under the Unfair Terms in Consumer Contract Regulations 1999.

Decision

F lost on all grounds.

(1) The retention was not a payment by the tenant to the landlord and so did not fall within the Housing Act 2004. In construing the sections of the Act and applying them to the present case:
    “… references to ‘paid’, ‘received’, ‘repay’ and ‘transfer of property’ are simply inapt, in my judgment, to describe a situation in which a tenant pays nothing but is the person to whom money is paid, albeit that he is not to be paid some part of the money representing the purchase price of what was his property until some date in the future.’” (paragraph 9).
(2) There was no forfeiture or penalty clause as F had no proprietary right in the retention figure and it was not a sum that became payable upon breach. All that had been lost was a contingent right to payment of a debt.

(3) The 1999 regulations did apply. Although F had a solicitor advising him on the transaction, that did not necessarily mean that any particular clause had been ‘individually negotiated’ for the purposes of the regulations. The clause could be struck out if it created a significant imbalance in the parties’ rights and obligations. It was argued for F that under the agreement U could avoid the final payment for any trivial breach of the tenancy agreement. The Court of Appeal did not agree; it allowed non payment in the event of termination. As this was an assured tenancy, only a court could bring the tenancy to an end and it would not do so on trivial grounds. There was therefore no significant imbalance and the clause allowing for non payment was upheld.


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