Scott v Southern Pacific Mortgages Ltd [2015] A.C. 385

Key point

  • A purchaser of land does not have sufficient interest in property to confer an equitable proprietary right before completion of sale

Facts

Background

  • In a what is known as a ‘sale and lease back’ transaction, Mrs Scott (D) agreed to sell her house below market value to N, with the promise that she could stay indefinitely at discounted rent
  • N borrowed the purchase money from Souther Pacific Mortgages (C) and agreed to grant C a mortgage over the house
  • The completion of sale occurred right before the execution of the mortgage on the same day

Scott Diagram

Dispute

  • Subsequently, N defaulted on payment of its loan with C
  • C sought an order of possession of the house
  • D sought to argue that she had an an overriding interest in the property
    • She had equitable lease in the property arising from from proprietary estoppel due to N’s promise
    • Her equitable interest was overriding due her being in actual occupation on the date of execution of the mortgage

Held (House of Lords)

  • D did not have an overriding interest protected by actual occupation
  • Prior to completion of sale, D only had a personal right under proprietary estoppel
  • There was no scintillia temporis between the completion of sale and the execution of mortgage during which D could have obtained a proprietary equitable interest that could be protected by actual occupation

Lord Collins

Pre-completion of sale

  • Prior to the acquisition of the legal estate a purchaser of property could not grant equitable rights of a proprietary character but only of a personal character
  • A personal right only coverts to a proprietary right when it is ‘fed’ by the purchaser’s acquisition of the legal estate
  • Thus, D had acquired only personal equitable rights against N based on N’s promise prior to completion

Post-completion of sale

  • The transfer of legal estate and the grant of the mortgage were one indivisible transaction (pursuant to Cann)
  • Hence, D could not assert priority over C’s mortgage

Baroness Hale

Pre-completion of sale

  • The interest of the purchaser between contract and completion does not allow him to grant a proprietary interest prior to completion
  • Furthermore, the purchaser before completion has no legal estate and thus cannot create an interest that is capable of being protected under s29(1) LRA 2002, which only relates to interests affecting legal estates

Post-completion of sale

  • Completion and mortgage are one indivisible transaction and there is no scintilla temporis between them in the standard case where:
    1. Completion and mortgage take place virtually simultaneously and
    2. The mortgage is granted to secure borrowings without which the purchase would not have taken place
  • In the current case, there was no scintillia temporis between the completion and the execution of the mortgage so that the estoppel was fed before the mortgage was executed

Commentary

  • This case creates an exception to the ordinary rule that the beneficiary under a trust can create a sub-trust of his beneficial interest
  • Based on the ordinary rule, N would have had a equitable title to the property under a constructive trust arising from the contract of sale, which he could hold on a sub-trust for D should one have arisen by proprietary estoppel
  • However, there is good reason for the exception as well as the scintillia temporis rule: without them, borrowers can defeat a mortgage granted to their lenders by entering into possession of the relevant property right before the completion of sale and in doing so obtaining a overriding interest protected by actual occupation