The Supreme Court has expressed ‘great sympathy’ for former homeowners who may have been victims of ‘unprofessional and dishonest behaviour’ by solicitors appointed to act for them in sale-and-rent-back transactions.

On Tuesday the Supreme Court unanimously dismissed an appeal in Scott (appellant) v Southern Pacific Mortgages Limited (respondents) [2014] UKSC 52. This was one of 10 test cases in which homeowners were persuaded to sell their properties to buyers who promised them the right to remain in their homes as tenants for an extended period after the sale.

The buyers bought the homes with the assistance of mortgages from lenders who were not given notice of the promises made to the homeowners.

Criminal charges are pending. The original owners and lenders, said Lord Collins, may have been victims of fraud. Some of the solicitors involved in the transactions, he noted, were subsequently the subject of disciplinary proceedings. 

He said: ‘[The former homeowners] may have claims against the Solicitors’ Compensation Fund, but the fact remains that they may lose their homes if they do not succeed on this appeal.’

The purchasers/mortgagors were nominees for an entity called North East Property Buyers (NEPB). In each case the purchaser applied for a loan from one of the 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 of six months’ duration. Contract exchange and completion, and execution of the mortgage, took place on the same day.

Neither the rights of occupation promised by the purchasers to the vendors, nor the tenancies granted by the purchasers were permitted by the lenders’ mortgages. When the purchasers defaulted on their mortgage payments, the lenders sought possession of the homes, which the tenants fought in the High Court in 2010 and in the Court of Appeal in 2012.

The Supreme Court was asked to consider, in Scott, whether the appellant had interests whose priority was protected by virtue of section 29(2)(a)(ii) of, and schedule 3, paragraph 2 to, the Land Registration Act 2002.

The five judges agreed that the purchaser was not in a position at the date of exchange, or any time up until completion, to confer equitable proprietary rights on the vendors, as opposed to personal rights only. The judges were divided over the secondary question of whether the contract should be seen as an indivisible transaction with the conveyance and the mortgage.  

In addressing the second issue, Lord Collins said: ‘[It is important] to emphasise that the scheme in the present case could not have worked if the solicitors for the vendors and the solicitors for the purchasers/lenders had complied with their professional obligations and proper and normal conveyancing practice.’

Paul Heeley, partner at TLT, which acted for lender Southern Pacific, warned solicitors involved in sale-and-rent-back schemes to be very careful when giving advice to lender clients.

‘Solicitors are under pressure to get transactions through quickly…but they have to balance [competing interests] in a way that is upfront and honest,’ he said.

The court noted that there are about 90 other cases in Newcastle involving NEPB and some 20 different lenders, ’but also many other cases in other parts of England involving similar schemes’.

Said Heeley: ’Some of these cases will involve court proceedings that have been put on hold. Many other cases have arisen but proceedings have not started.’