In the matter of North East Property Buyers Litigation
 EWHC 2991 (Ch), November 23, 2010
HHJ Behrens (sitting as a High Court judge)
The High Court has held that a sale and leaseback agreement did not confer on the vendor an overriding interest in the land which took priority over the mortgage used to purchase the property.
Certain interests in land may be binding on a purchaser or mortgagee even if they are not registered: s.29(2), Land Registration Act 2002. These overriding interests include: (i) a leasehold estate in land not exceeding seven years; and, (ii) a proprietary interest belonging to a person in actual occupation of the land at the time of the disposition: 2002 Act, Sch.3, paras 1 and 2. Where the owner of a registered estate grants a leasehold interest out of that estate for a term of seven years or less, it is deemed to have been registered at the time of its grant: s.29(4) of the 2002 Act.
Where someone purchases a property with the aid of a mortgage and there has been a prior agreement that the mortgage will be secured over the property, the transaction acquiring the legal estate and the granting of the charge are one indivisible transaction with the effect that at no point does the purchaser have an unencumbered estate: Abbey National v Cann  A.C. 56, HL. In Redstone v Welch & Jackson  EG 98, a sale and leaseback agreement was held to be an indivisible transaction with the effect that the purchaser did not have an unencumbered estate with which to grant a mortgage with priority over the tenancy.
The court was required to determine two preliminary issues in nine test cases concerning the effect of a sale and leaseback agreement. In each case, the defendant was the registered owner of residential property who entered into a sale and leaseback agreement with North East Property Buyers (NEPB). Under the agreement, the defendant conveyed his freehold interest to a nominee of NEPB in consideration for the nominee granting him an assured shorthold tenancy of the property. In each case, the term of the tenancy was less than seven years. It was a condition of the agreement that the defendant would pay back a significant proportion of the proceeds of the sale to NEPB. The purchase of the property was to be funded in the main by a mortgage secured over the property in the name of the nominee. The exchange of contracts between the defendant and the nominee took place on the same day as the grant of the mortgage.
In all nine cases, the nominee subsequently defaulted on the mortgage repayments and the claimant mortgage companies sought possession.
In each case, the defendant argued that the sale and leaseback agreement conferred on the defendant an equitable interest which, when coupled with actual occupation of the property, was an overriding interest under 2002 Act, Sch.3, para.2. In the alternative, it was argued that the tenancy agreement, which was granted prior to registration of the mortgage, took priority over the mortgage because s.29(4), 2002 Act, provided that such a leasehold interest was deemed to be registered when it was granted.
The High Court found for the claimant mortgage companies. If there is a “dead heat” between competing interests (in this case, the defendants’ overriding interests and the claimants’ legal charges) in circumstances where the purchase of an estate could not have proceeded without funds advanced by the mortgagee, the mortgagee’s interests takes priority. It followed that Redstone had been wrongly decided.
In any event, it was doubtful whether the sale and leaseback agreement conferred a proprietary interest on the defendants. Prior to completion, NEPB had no right to possession and could not grant a proprietary interest. Even if it had such an interest, it had in all likelihood been transferred to the nominee of NEPB as part of the conveyance under s.63(1), Law of Property Act 1925. Nor did the tenancy agreements for terms of less than seven years take priority over the registered charges. Prior to the registering of the freehold interest the grant of any tenancy was not out of a registered estate and this meant that s.29(4) of the 2002 Act did not apply.
Permission to appeal was granted.