The cases of Cook v The Mortgage Business plc; Tweddell v Southern Pacific Mortgages Ltd; Taylor v Southern Pacific Mortgages Ltd; Scott v Southern Pacific Mortgages Ltd recently came before the Court of Appeal. In this case numerous vendors had dealt with North East Property Buyers (NEPB), which appeared to specialise in distressed sale situations. They offered a solution wherein the properties would be sold at a discount but with the promise of a lease back so that the vendor 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 NEPB, who had obtained in their own names, often via specialist brokers, buy-to-let loans to fund the purchases. The new mortgagees believed that they were lending on buy-to-let loans for individual borrowers purchasing the properties, and had no knowledge of the special leaseback arrangements.
Problems then arose when the loans defaulted. The mortgagees did not know the purchasers were nominees for NEPB. Lord Justice Etherton remarks in his leading Judgment that there was nothing at all in the sales contract or in the transfer to the new owners which would or should have put the new mortgagees on notice of any arrangement involving previous owners.
The result was that, when the loans went into default, the mortgagees became aware for the first time that the tenants in occupation were not in occupation in accordance with the type of letting which is typically permitted under buy to let mortgages (i.e. an assured short hold tenancy of not more than one year). Instead, they were actually in occupation under non-conforming tenancies which were in breach of the buy to let loan.
The mortgagees sought vacant possession of the properties, and had to join the tenants in occupation as defendants to the proceedings. In their defence to the possession claims, the tenants argued that they had interests which should override the entitlement of the mortgagee to possession. The vendors had described the transactions as equity release schemes. It was ruled that this was incorrect. Equity release schemes are an arrangement between a lender and the owner who remains the legal owner and are affected via a mortgage. It was ruled that these transactions were instead sale and rent back arrangements where the two halves of the transaction were very carefully separated out.
In dismissing the vendor’s appeal, Lord Justice Etherton said: "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."
Published on 03/02/2012