The doctrine of proprietary estoppel may help clients who sold their house in return for tenancy but have since been given notice to quit.

Consider this: A and his wife, B, own a house. A loses his job and is left with B’s income alone. They cannot service the mortgage payments and other outgoings. Debts build up. A and B need to pay off the mortgage and require an urgent injection of capital. They enter into an arrangement by which they sell their house at a discount in return for being granted a tenancy. Salvation. Six or 12 months later, despite the arrangement having been sold as one which will enable them to remain in their house indefinitely, they receive a notice to quit and they appear to have no answer to the possession claim which inevitably follows. The buyer has secured the property at a – possibly quite substantial – discount and has received rent in the interim.

Abuses within the sell-to-rent-back market have been in the news and, in the present economic climate, increasing numbers of people are likely to find themselves in that hypothetical couple’s position. Central bank lending rates may have come down but these savings have not invariably been passed on to borrowers; still less, rates on other forms of borrowing such as that on credit cards.

At the heart of the abuse is that the sell-to-rent-back arrangement is generally effected through the mechanism of a standard assured shorthold tenancy, under which possession may be recovered at the conclusion of the initial tenancy period by giving notice under section 21 of the Housing Act 1988. The one saving grace at the moment for some may be that, in a falling market, the rent-back buyer may be content to receive rent, but when the recovery comes and house prices start to rise, there may be a corresponding increase in claims for possession.

Practitioners advising sell-to-rent-back tenants facing possession claims need not necessarily abandon all hope, however, even though contractual remedies, where available, may not provide adequate compensation, and rescission, in particular, may be problematic where the sell-to-rent-back agreement was entered into because the status quo was untenable and replacement borrowing near impossible.

What sell-to-rent-back defendants generally wish to achieve is a continuation of their occupation as a tenant and, where assurances have been made as to security of tenure, the equitable doctrine of proprietary estoppel may provide a mechanism to achieve this end.

The application of proprietary estoppel to landlord and tenant relationships is well established (see Manton Securities Ltd v Nazam (T/A New Dadyal Cash & Carry) [2008] EWCA Civ 805 – tenancy-at-will elevated to business tenancy) as is its potential application to residential tenancies (Holmes v South Yorkshire Police Authority [2008] EWCA Civ 51). The difficulty the claimant in Holmes faced was that he was unable to prove an essential element, detriment, but the applicability of estoppel in principle to a residential tenancy was accepted by the Court of Appeal. This starts to help fill in the gaps left by the House of Lords in Bruton v London and Quadrant Housing Trust [2000] 1 AC 406 where, in slightly different circumstances, the creation of a residential tenancy by estoppel was acknowledged but the chance to give more guidance consciously eschewed.

There have, however, been decided cases at first instance (the author has been involved in two) in which tenants, who have spent time and money renovating properties subject to an assured shorthold tenancy in reliance on a promised security of tenure, have successfully defeated landlords’ possession claims based on termination, by the giving of notice by establishing that the component elements of proprietary estoppel have been satisfied.

The elements of estoppel have been broken down in a number of ways. The authorities variously set out between three and five elements, but the author’s preferred formulation is:

The holding out of a promise or expectation, which is... relied upon and leads to... a person acting to their detriment.
The ‘proprietary’ element simply means that the promise or expectation relates to land, a requirement which would, ex hypothesi, be satisfied in all sell-to-rent-back cases. Depending upon the facts of the individual cases, the other elements would appear to be capable of being established in a fair proportion of sell-to-rent-back cases.

The difficulty the claimant in Holmes faced in establishing detriment ought not to be problematic for the sell-to-rent-back defendant where the house has been sold at a discount from the full market price. Practitioners should, however, bear in mind that simply entering into a bargain which provided less security of tenure than was promised might, in itself, constitute a detriment.

When dealing with estoppel, there are a number of other important points:

2) The detriment
  • ‘The authorities... show that [detriment] is not a narrow or technical concept. The detriment need not consist of the expenditure of money or other quantifiable financial detriment, so long as it is substantial. The requirement must be approached as part of a broad enquiry as to whether repudiation of an assurance is or is not unconscionable in all the circumstances’ (Gillett v Holt per Robert Walker LJ at 836C).
  • A strict financial measure of the detriment is not required; see Lewison J’s observations in Earl of Macclesfield v Parker (supra) on Pascoe v Turner [1979] 1 WLR 431 (CA): ‘Although the improvements were modest, their cost represented a large part of the defendant’s savings. The Court of Appeal held that an equity had been established...’
3) The relief
The general rule is that the ‘expectation is the maximum extent of the equity’ ­– Earl of Macclesfield v Parker (supra) at paragraph 210, and see also paragraph 243, therefore if the promise or expectation was of something less than lifetime security, that is likely to circumscribe the relief the court awards. That also explains why, when both parties have clearly intended to enter into a relationship of landlord and tenant, the use of estoppel to generate some wholly different form of tenure is unlikely to succeed, an important consequence of which is that the doctrine is less likely to help those from whom possession is being sought on the grounds of rent arrears or any other breach-based ground.

1) The promise
  • Reading of appellate decisions shows that the most common failing of judges at first instance is to treat estoppel as something akin to a contract and to seek similar contractual elements (Robert Walker LJ in Gillett v Holt [2000] 3 WLR 815 (CA) bears reading from the bottom of 828);
  • Estoppel does not require an irrevocable promise – Gillett v Holt@ 830H - 833H, especially 833B ‘as already noted, it is the other party’s detrimental reliance on the promise which makes it irrevocable’;
  • Nor is a mutuality of understanding required - ibid per Robert Walker LJ at 833H-834H, especially 834D ‘...in other cases well within the mainstream of proprietary estoppel, such as Inwards v Baker [1965] 2 QB 29 and the 19th century decisions applied in that case, there is nothing like a bargain as to what particular interest is to be granted, or by what type of disposition it is to be granted. The link is provided by the bare fact of A encouraging B to incur expenditure on A’s land’;
  • It is not even necessary that the promise was made knowingly – see Earl of Macclesfield v Parker [2003] EWHC 1846 (Ch) at paragraph 208 citing Taylor Fashions v Liverpool Victoria Trustees (Note) [1982] QB 133: ‘...[estoppel] requires a very much broader approach which is directed rather at ascertaining whether, in particular individual circumstances, it would be unconscionable for a party to deny that which, knowingly or unknowingly, he has allowed or encouraged another to assume to his detriment...’This is particularly important in the sell-to-rent-back context because the unscrupulous landlord in sell-to-rent-back cases will often have been careful to foster one impression while treading carefully round any express assurance.

Finally, two elements of caution are required. First, it will not necessarily be the case that an estoppel will always lead to establishing security of tenure: the expectation is the maximum, not the minimum, extent of the equity. Once established, an estoppel gives the court a broad measure of discretion as to what is necessary to achieve justice between the parties – see Crabb v Arun DC [1976] Ch 179. Second, while everything in this article is soundly based on well-established authority, it would be nice to be able to have the comfort of an appellate decision directly on point.

Nonetheless, in the author's view, the availability of an estoppel-based defence ought, at least, to be considered in all sell-to-rent-back cases.

Rawdon Crozier is a barrister at King’s Bench Chambers in Plymouth