Homeowners' Rights & Priority in Property Transfers under Land Registration Act, Exercises of Law

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Michaelmas Term [2014] UKSC 52 On appeal from [2012] EWCA Civ 17 JUDGMENT Rosemary Scott (Appellant/Second Defendant) and Southern Pacific Mortgages Limited (Claimant/First Respondent) and Mortgage Express (Second Respondent) and Amee Lydia Wilkinson (First Defendant) and The Mortgage Business Plc (Intervener) before Lady Hale Lord Wilson Lord Sumption Lord Reed Lord Collins JUDGMENT GIVEN ON 22 October 2014 Heard on 3 and 4 March 2014 Appellant First Respondent Bryan McGuire QC Justin Fenwick QC James Stark Nicole Sandells Nicholas Broomfield (Instructed by Paula Harris, David Gray Solicitors LLP) (Instructed by Paul Heeley, TLT LLP) Second Respondent Justin Fenwick QC Nicole Sandells Nicholas Broomfield (Instructed by Ian Drew, Walker Morris LLP) Intervener Lesley Anderson QC Daniel Gatty (Instructed by Richard Pitt, Eversheds LLP) Page 4 completion of a purchase, the transactions of acquiring the legal estate and granting the charge are one indivisible transaction, and an occupier cannot assert against the mortgagee an equitable interest arising only on completion. Mrs Scott's case 11. The only appeal before this court is that by Mrs Scott, but because this is a test case I shall for convenience refer to the arguments on her behalf as those of “the vendors”. In order to put some flesh on the scheme, I propose to illustrate it by reference to some of the facts of Mrs Scott’s case, although it should be emphasised that there have been no findings of fact and that the lenders have not agreed the statement of facts from which this account is taken. 12. Mrs Scott and her former husband Mr Scott were originally secure tenants of a house in Longbenton, Newcastle upon Tyne. They bought the house from North Tyneside Borough Council in 1999 on a mortgage from Cheltenham and Gloucester, and became the registered proprietors with absolute title. Five years later Mr Scott left Mrs Scott and she fell into financial difficulties. In 2005 she decided to put the house on the market at £156,000 but only received an offer significantly below the asking price. 13. Mrs Scott was subsequently approached by a man who told Mrs Scott that he had heard she was trying to sell her house, and said that a friend of his worked for a Mr Michael Foster who was looking to buy properties in the area and that Mr Foster would pay the asking price and rent it back to Mrs Scott. 14. Mr Foster, who was in some way connected with NEPB, then met Mrs Scott and told her that he would purchase the property for £135,000 and that she could stay as a tenant at a discounted rent of £250 a calendar month. If she stayed for ten years she would receive a lump sum of £15,000, which would make up some of the deficit in the sale price, and she would receive £24,000 from the net proceeds of sale. The outstanding mortgage to Cheltenham and Gloucester was in the region of £70,000, and so the equity would have been about £65,000. A deduction of £40,000 would be paid to NEPB. 15. Mrs Scott told Mr Foster that she wished to live in the property indefinitely and he assured her that she could stay as long as she liked, and that if she were to die the tenancy would be automatically transferred into her son’s name and he would receive the lump sum at the end of the ten-year period. Page 5 16. Mr Foster said that he would arrange solicitors for her and be responsible for the legal fees so long as those solicitors were used. Those solicitors were Hall & Co, who also acted for the vendors in most of the other cases. The solicitors for the purchaser were Adamsons, who, in the usual way, also acted for the lenders (and also acted in other transactions of this type). 17. Ms Amee Wilkinson was the nominee purchaser for NEPB. Ms Wilkinson was made a buy to let interest only mortgage offer by Southern Pacific Mortgages Ltd on June 15, 2005. The loan amount was £114,750 and £1,751.50 fees. The mortgage offer stated that the purchaser was not bound by the terms of the offer until the purchaser had executed the legal charge, the funds had been released, and the legal transaction had been completed. 18. In the course of the conveyancing process, the answers to the requisitions on title in respect of vacant possession were that arrangements might be made direct with the seller “as to both the handover of keys and the time that vacant possession would be given.” 19. The agreement for sale, dated August 12, 2005, was expressed to be with Full Title Guarantee and subject to the Standard Conditions of Sale (4th Edition). The Special Conditions attached at Clause 4 were left by both firms of solicitors without either of the alternatives being deleted so that it read, “The property is sold with vacant possession (or) The property is sold subject to the following Leases or Tenancies”. No leases or tenancies were listed. 20. Completion of the transfer (TR1) from Mrs Scott and Mr Scott to Ms Wilkinson and the legal charge by Ms Wilkinson to SPML also took place on August 12, 2005. The transfer and the charge were registered on September 16, 2005. 21. Four days later, on August 16, 2005 UK Property Buyers acting as agents for Ms Wilkinson, contrary to the terms of Ms Wilkinson’s mortgage, granted Mrs Scott a two-year assured shorthold tenancy at the reduced rent. On expiry of the fixed term, the tenancy was stated to become a monthly periodic tenancy terminable on not less than two months’ notice in writing. Mrs Scott also received, dated August 16, 2005, a document promising that she could remain in the property as the tenant and that a loyalty payment of £15,000 would be paid after ten years. 22. Three years later, in August 2008, Mrs Scott became aware that there might be a mortgage on the property. A letter was sent to Mrs Scott by North East Page 6 Property Lettings suggesting that there had been teething problems following an office move and that some tenants had been receiving letters from mortgage companies stating that the account was in arrears, which, the letter assured Mrs Scott, was incorrect. A few months later, Mrs Scott discovered, through accidentally opening a letter addressed to Ms Wilkinson at the house, that a possession order had been made on March 17, 2009 without her knowledge, pursuant to proceedings commenced in February 2009. Subsequently, she received a warrant of possession due to be executed on May 20, 2009. 23. The warrant of possession was suspended and Mrs Scott was joined as a defendant in the possession proceedings so that she could argue that she had an overriding interest under the 2002 Act. 24. It is impossible not to feel great sympathy with Mrs Scott and the former home owners in her position, who may have been not only the victims of a fraud which tricked them out of their homes, but also of unprofessional and dishonest behaviour by the solicitors appointed to act for them. They 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. 25. But there is also an important public interest in the security of registered transactions. There are more than 23 million registered titles in England and Wales, and each month the Land Registry may handle up to 75,000 house sales, of which the vast majority will be financed by secured loans. The judgments of Judge Behrens and the Court of Appeal 26. Ultimately, Mrs Scott’s case was selected as one of the ten test cases to be tried before Judge Behrens. At a case management conference, he ordered that three preliminary issues should be tried, of which only the first remains live, namely: “With reference to section 29 of the [2002 Act] are any of the interests alleged by the defendants capable of being interests affecting the estates immediately before and/or at the time of the disposition, namely the transfer and/or charge of the property in question, sufficient to be an overriding interest under paragraph 1 and/or 2 of Schedule 3 to the 2002 Act? …” Page 9 subsisting in reference thereto, and such interests shall not be treated as incumbrances within the meaning of this Act, (that is to say) . . . (g) The rights of every person in actual occupation of the land or in receipt of the rents and profits thereof, save where inquiry is made of such person and the rights are not disclosed; . . .” 34. The object of section 70(1)(g) was “to protect a person in actual occupation of land from having his rights lost in the welter of registration … No one can buy the land over his head and thereby take away or diminish his rights”: Lord Denning MR in Strand Securities Ltd v Caswell [1965] Ch 958, 979. 35. The rights which were overriding rights related primarily to rights which in unregistered conveyancing were not normally included in title deeds or revealed in abstracts of title. Overriding interests in general were an impediment to one of the main objectives of land registration, that the land register should be as complete a record of title as it could be: see, eg Gray and Gray, Elements of Land Law (5th ed. 2008), para 8.2.44. Reform of the law of land registration was on the agenda of the Law Commission from its inception. Overriding interests were considered in the Third Report on Land Registration (Law Com No 158, paras 2.54-2.70, 1987) and the Fourth Report (Law Com No 173, 1988), and in a joint consultation by the Law Commission and HM Land Registry in 1998. The Law Commission ultimately produced a draft Bill which led to the 2002 Act: Land Registration for the 21st Century: A Conveyancing Revolution (2001), Law Com No 271, in which it referred to section 70(1)(g) of the 1925 Act as “notorious and much-litigated” (para 8.15). 36. One of the principal objectives of what became the 2002 Act was to create a simplified conveyancing system, electronically based, under which it would be possible to investigate title to land almost entirely on-line with the bare minimum of additional inquiries: Law Com No 271, paras 8.1 et seq. A major obstacle to that goal was the existence of overriding interests. Although the 2002 Act was intended to minimise the circumstances in which new overriding interests arose, the Law Commission recommended the retention of the overriding status of occupiers' rights. 37. The reason which had been given in the joint consultation was that: “it is unreasonable to expect all encumbrancers to register their rights, particularly where those rights arise informally, under (say) a Page 10 constructive trust or by estoppel. The law pragmatically recognises that some rights can be created informally, and to require their registration would defeat the sound policy that underlies their recognition. Furthermore, when people occupy land they are often unlikely to appreciate the need to take the formal step of registering any rights that they have in it. They will probably regard their occupation as the only necessary protection. The retention of this category of overriding interest is justified…because this is a very clear case where protection against purchasers is needed but where it is ‘not reasonable to expect or not sensible to require any entry on the register’.” (Law Com No 254, para 5.61). 38. The expression “overriding interests” is not found in the 2002 Act, except in relation to transitional matters. The heading to Schedule 3 is “Unregistered interests which override registered dispositions.” 39. So far as is relevant the scheme of the 2002 Act (leaving aside the special provisions for leases of seven years or less, which do not now arise on this appeal) is as follows: (1) a registered owner has the power to make a disposition of any kind permitted by the general law in relation to an interest of that description: section 23(1)(a); (2) a person is entitled to exercise owner's powers in relation to a registered estate or charge if he is (a) the registered proprietor, or (b) entitled to be registered as the proprietor: section 24; (3) by section 27 certain dispositions, including transfers of land and legal mortgages, are required to be registered and do not operate at law until the relevant registration requirements are met; (4) the basic rule is that the priority of an interest affecting a registered estate or charge is not affected by a disposition of the estate or charge: section 28; (5) section 29 deals with the effect of registered dispositions and provides: “(1) If a registrable disposition of a registered estate is made for valuable consideration, completion of the disposition by registration has the effect of postponing to the interest under the disposition any interest affecting the estate immediately before Page 11 the disposition whose priority is not protected at the time of registration. (2) For the purposes of subsection (1), the priority of an interest is protected - (a) in any case, if the interest - (i) is a registered charge or the subject of a notice in the register, (ii) falls within any of the paragraphs of Schedule 3 …”; (6) Schedule 3 is headed “UNREGISTERED INTERESTS WHICH OVERRIDE REGISTERED DISPOSITIONS,” and paragraph 2 includes: “An interest belonging at the time of the disposition to a person in actual occupation, so far as relating to land of which he is in actual occupation, except for - (b) an interest of a person of whom inquiry was made before the disposition and who failed to disclose the right when he could reasonably have been expected to do so; (c) an interest - (i) which belongs to a person whose occupation would not have been obvious on a reasonably careful inspection of the land at the time of the disposition, and (ii) of which the person to whom the disposition is made does not have actual knowledge at that time ...”; (7) section 72 grants priority protection to those who apply for an entry in the register during the priority period; (8) section 116 is headed “Proprietary estoppel and mere equities” and provides: “It is hereby declared for the avoidance of doubt that, in relation to registered land, each of the following - (a) an equity by estoppel, and (b) a mere equity, Page 14 44. The sale of 30 Island Road and purchase of 7 Hillview by George were completed on August 13, 1984. George subsequently defaulted in his payments to Abbey National, and Abbey National commenced proceedings for possession against George, Mrs Cann and Abraham Cann. George took no part in the proceedings. The decision 45. The defence of Mrs Cann and Abraham Cann was that, because of a contribution made by Mrs Cann to the purchase of 48 Warren Road (represented by her status as a sitting tenant) and by reason of the assurance given by George that she would always have a roof over her head, she had an equitable interest in 7 Hillview, which, by virtue of her actual occupation, had taken priority over Abbey National’s charge as an overriding interest. 46. The first two main holdings of the House of Lords present no difficulty on the present appeal. First, it was held that the relevant date for determining the existence of overriding interests affecting the estate transferred or created was the date of registration of the estate rather than the date of completion: at pp 87, 106. The 2002 Act lays down the general principle in section 29(1) that completion of a disposition by registration has the effect of postponing to the interest under the disposition any interest affecting the estate immediately before the disposition whose priority is not protected at the time of registration (including overriding interests: section 29(2)(a)(ii)). 47. Second, it was held that to substantiate a claim to an overriding interest against a transferee or chargee by virtue of section 70(1)(g) of the 1925 Act, as a person in actual occupation of the land, the person claiming the overriding interest had to have been in actual occupation at the time of completion: at pp 88, 106. Schedule 3, paragraph 2 of the 2002 Act now expressly confirms that the relevant interest must belong “at the time of the disposition to a person in actual occupation.” 48. The other holdings are the crucial ones on this appeal, which are these: (1) where a purchaser relies on a bank or building society loan for the completion of a purchase, the transactions of acquiring the legal estate and granting the charge are one indivisible transaction; (2) George never acquired anything but an equity of redemption and there was no scintilla temporis during which the legal estate vested in him free of the charge and an estoppel affecting him could be “fed” by the acquisition of the legal estate so as to become binding on, and take priority over the interest of, the chargee; and (3) consequently Mrs Cann could have no overriding interest arising from actual occupation Page 15 on the day of completion. The vendor remained the proprietor until registration, but the charge was created on its execution: at p 80. 49. On the facts it was held in any event that Mrs Cann was not in actual occupation at the time of completion (since all that happened prior to completion was that removers were unloading her carpets and furniture for about 35 minutes) and that she was precluded from relying on any interest as prevailing over Abbey National because she had impliedly authorised George to obtain the mortgage. 50. Lord Oliver gave the leading opinion, with which Lords Bridge, Griffiths and Ackner expressly agreed. Lord Jauncey concurred in a full opinion, but there is no substantial difference between his reasoning and that of Lord Oliver. The following points emerge from Lord Oliver’s opinion. First, prior to completion Mrs Cann had no interest in 7 Hillview, because she was not a party to the contract for the purchase of that property and if she had been led to believe that she would have an interest in and the right to occupy that property when George acquired it, at the stage prior to its acquisition she had no more than a personal right against him. Second, Abbey National, as an equitable chargee for money actually advanced prior to completion, had an interest ranking in priority to what was merely Mrs Cann's expectation of an interest under a trust for sale to be created if and when the new property was acquired. Third, there was no notional point of time at which the estate vested in George free from the charge and in which the estoppel affecting him could be “fed” by the acquisition of the legal estate so as to become binding on and take priority over the interest of the mortgagee, approving the analysis of Mustill LJ in Lloyds Bank plc v Rosset [1989] Ch 350, 388-393, and disapproving Church of England Building Society v Piskor [1954] Ch 553. 51. Lord Oliver said (at pp 92-93): “The reality is that, in the vast majority of cases, the acquisition of the legal estate and the charge are not only precisely simultaneous but indissolubly bound together. The acquisition of the legal estate is entirely dependent upon the provision of funds which will have been provided before the conveyance can take effect and which are provided only against an agreement that the estate will be charged to secure them. Indeed, in many, if not most, cases of building society mortgages, there will have been, as there was in this case, a formal offer and acceptance of an advance which will ripen into a specifically enforceable agreement immediately the funds are advanced which will normally be a day or more before Page 16 completion. In many, if not most, cases, the charge itself will have been executed before the execution, let alone the exchange, of the conveyance or transfer of the property. This is given particular point in the case of registered land where the vesting of the estate is made to depend upon registration, for it may well be that the transfer and the charge will be lodged for registration on different days so that the charge, when registered, may actually take effect from a date prior in time to the date from which the registration of the transfer takes effect …The reality is that the purchaser of land who relies upon a building society or bank loan for the completion of his purchase never in fact acquires anything but an equity of redemption, for the land is, from the very inception, charged with the amount of the loan without which it could never have been transferred at all and it was never intended that it should be otherwise. The ‘scintilla temporis’ is no more than a legal artifice …” 52. Lord Jauncey said that, on completion of the purchase of 7 Hillview, Mrs Cann acquired an equitable interest in that house. Since that interest derived from George it followed that she could acquire no equitable interest in the house prior to his acquisition of an interest therein on completion, nor could she acquire an interest greater than he acquired. He went on (at pp 101-103): “It is of course correct as a matter of strict legal analysis that a purchaser of property cannot grant a mortgage over it until the legal estate has vested in him. The question however is whether having borrowed money in order to complete the purchase against an undertaking to grant security for the loan over the property the purchaser is, for a moment of time, in a position to deal with the legal estate as though the mortgagee had no interest therein. …In my view a purchaser who can only complete the transaction by borrowing money for the security of which he is contractually bound to grant a mortgage to the lender eo instante with the execution of the conveyance in his favour cannot in reality ever be said to have acquired even for a scintilla temporis the unencumbered fee simple or leasehold interest in land whereby he could grant interests having priority over the mortgage or the estoppel in favour of prior grantees could be fed with similar results. Since no one can grant what he does not have it follows that such a purchaser could never grant an interest which was not subject to the limitations on his own interest. … Page 19 60. The question therefore arises whether a purchaser, prior to acquisition of the legal estate, can grant equitable rights of a proprietary character, as opposed to personal rights against the purchaser. Many of the cases on the nature of the purchaser’s interest after exchange of contracts, but before completion, were cited on this appeal, and I endeavoured at first instance in Englewood Properties Ltd v Patel [2005] 1 WLR 1961, paras 40-43 to deal with their effect. See also Turner, Understanding the Constructive Trust between Vendor and Purchaser (2012) 128 LQR 582. 61. The position of the vendor as trustee has been variously described as: (1) “something between what has been called a naked or bare trustee, or a mere trustee (that is, a person without beneficial interest), and a mortgagee who is not, in equity (any more than a vendor), the owner of the estate, but is, in certain events, entitled to what the unpaid vendor is, viz, possession of the estate” and “a constructive trustee”: Lysaght v Edwards 2 Ch D 499, 506, 510, Sir George Jessel MR; or (2) “constructively a trustee”: Shaw v Foster (1872) LR 5 HL 321, 349, per Lord O'Hagan; (3) “a trustee … with peculiar duties and liabilities”: Earl of Egmont v Smith (1877) 6 Ch D 469, 475, per Sir George Jessel MR; (4) “a trustee in a qualified sense only”: Rayner v Preston (1881) 18 Ch D 1, 6, per Cotton LJ; and (5) “a quasi-trustee”: Cumberland Consolidated Holdings Ltd v Ireland [1946] KB 264, 269, per Lord Greene MR. 62. It has frequently been said that a purchaser of land obtains rights which are akin to ownership: by Lord Cairns in Shaw v Foster (1872) LR 5 HL 321, 338, “the purchaser was the real beneficial owner in the eye of a court of equity of the property”; by Lord O’Hagan in the same case (at p 349), the ownership is transferred in equity to the purchaser, and the vendor is “in progress towards” being a trustee. In more modern times it has been recognised that the purchaser’s interest is a “proprietary interest of a sort”: Oughtred v IRC [1960] AC 206, 240, per Lord Jenkins. In Jerome v Kelly [2004] UKHL 25, [2004] 1 WLR 1409, para 32, Lord Walker made the point that “beneficial ownership of the land is in a sense split between the seller and buyer on the provisional assumptions that specific performance is available and that the contract will in due course be completed…” 63. In Shaw v Foster (at p 338) Lord Cairns said that a purchaser had not only the right to devise the property (under the equitable doctrine of conversion) but also the right to alienate it or charge it, and Lord O’Hagan said (at p 350) that the purchaser’s interest could be the subject of a charge or assignment, and that the sub-assignee or encumbrancer could enforce his rights against the original vendor. Page 20 64. But in the same case Lord Hatherley LC referred (at p 357) to the “fiction of Equity which supposes the money to be paid away with one hand and the estate to be conveyed away with the other,” and in the High Court of Australia Deane J said: “it is both inaccurate and misleading to speak of the unpaid vendor under an uncompleted contract as a trustee for the purchaser ... the ordinary unpaid vendor of land is not a trustee of the land for the purchaser. Nor is it accurate to refer to such a vendor as a ‘trustee sub modo’ unless the disarming mystique of the added Latin is treated as a warrant for essential misdescription”: Kern Corpn Ltd v Walter Reid Trading Pty Ltd (1987) 163 CLR 164, 192. The High Court of Australia has said that the description of the vendor as a trustee tends to conceal the essentially contractual relationship which, rather than the relationship of trustee and beneficiary, governs the rights and duties of the parties: Chang v Registrar of Titles (1976) 137 CLR 177, 190; Tanwar Enterprises Pty Ltd v Cauchi [2003] HCA 57, (2003) 217 CLR 315, para 53. 65. But these are not cases dealing with the question whether a contract of sale can have a proprietary effect on parties other than the parties to the contract. It is true that the purchaser is given statutory rights to enforce the interests against third parties under a contract of sale by registration: the 2002 Act, sections 15(1)(b), 32, 34(1); Land Charges Act 1972, section 2(1), (4). But it does not follow that the purchaser has proprietary rights for all purposes. Thus in Inland Revenue Commissioners v G Angus & Co (1889) 23 QBD 579, 595, Lindley LJ quoted Lord Cottenham LC in Tasker v Small (1837) 3 My & C 63, 70, who said that the rule by which a purchaser becomes in equity the owner of the property sold “applies only as between the parties to the contract, and cannot be extended so as to affect the interests of others.” 66. In Berkley v Poulett [1976] EWCA Civ 1, [1977] 1 EGLR 86, 93 Stamp LJ said (at para 36) that the vendor “is said to be a trustee because of the duties which he has, and the duties do not arise because he is a trustee but because he has agreed to sell the land to the purchaser and the purchaser on tendering the price is entitled to have the contract specifically performed according to its terms. Nor does the relationship in the meantime have all the incidents of the relationship of trustee and cestui que trust.” In that case Lord Poulett sold the Hinton St George Estate to X, and X sub-sold the house and grounds to Y. Both transactions were subsequently completed. In an action by Y against the executors of Lord Poulett, the main question which subsequently arose was whether certain objets d’art were fixtures or chattels. It was held that none of them was a fixture, but also by a majority (Goff LJ dissenting) that, even though Lord Poulett had notice of the sub-contract between X and Y, Lord Poulett was not under a duty to Y to take reasonable care of the house because Lord Poulett did not hold the house as trustee for the sub-purchaser Y. In my view it is implicit in this analysis, which I consider to be correct, Page 21 that X did not obtain proprietary rights against Lord Poulett which he could pass to Y. 67. There are some cases in the Court of Appeal and at first instance (all decided in the early 1950s) which considered the effect on a mortgagee of a grant of tenancies by a purchaser after exchange of contracts but before completion of the sale and a mortgage of the property. Coventry Permanent Economic Building Society v Jones [1951] 1 All ER 901 was a pre-cursor of Cann, and was approved in that decision. Harman J decided that the conveyance and mortgage were one transaction, and there was no scintilla temporis between the time of the conveyance and the mortgage during which the purchaser had acquired sufficient estate to be able to perfect the purported grant of the tenancies. Prior to the conveyance, the purchaser only had an equitable interest in the property and the tenants only had personal rights against the purchaser: at p 903. 68. That decision was distinguished by the Court of Appeal in Universal Permanent Building Society v Cooke [1952] Ch 95 on the ground that the building society’s charge in that case was executed a day later than the conveyance and there was nothing in the building society’s “short statement” that “the conveyance and the mortgage were part of a single transaction” (at p 101). That is a surprising (and very formalistic) ground of distinction, since it is apparent from the statement of the facts (at p 96) that the mortgagor had applied for the mortgage two weeks before the contract of sale. But it was recognised that prior to completion the purchaser was only “able to make a contract, a promise” to the intended tenant: at p 103. In Woolwich Equitable Building Society v Marshall [1952] Ch 1 Danckwerts J distinguished Coventry Permanent Economic Building Society v Jones on the equally surprising ground that the charge to the Woolwich Building Society recited that the mortgagor was the estate owner in respect of the property. 69. In Church of England Building Society v Piskor [1954] Ch 553 purchasers of leasehold premises were given possession before completion and purported to grant tenancies of part of the premises. The purchase was completed on the same day as the purchasers granted a legal charge to the building society. The Court of Appeal disapproved Coventry Permanent Economic Building Society v Jones and held that the assignment of the lease to the purchasers and the legal charge to the building society could not be regarded as one indivisible transaction. Consequently the tenancies by estoppel were fed on the acquisition of the legal estate by the purchasers and prior to the grant of the charge: at p 558, per Sir Raymond Evershed MR, and p 566, per Romer LJ. Page 24 77. Secondly, the vendors say that the substance of the matter is that they did not sell their homes outright to the purchasers, but simply sold them subject to the rights to the leases which they had been promised, and that Cann should be distinguished on the basis that in a sale and leaseback transaction the purchaser in reality has no more than a reversionary interest subject to that leaseback. They rely on a decision of Megarry J at first instance, Sargaison v Roberts [1969] 1 WLR 951, in which the question was whether, for the purposes of the tax legislation then in force, a transfer by the taxpayer into a settlement of a farm and the simultaneous grant by the trustees to him of a lease resulted in the whole of the taxpayer's interest in the land being transferred to another person (which would have disentitled him to a tax allowance) or operated to reduce his interest from ownership of a freehold to ownership of a lease. Megarry J held that the effect of the transaction was that the taxpayer’s interest had been reduced from ownership of the freehold to ownership of a lease. 78. I agree with Etherton LJ that the true nature of the transaction was that of a sale and lease back. Sargaison v Roberts is of no assistance since Megarry J made it clear (at p 958) that he was considering the interpretation of a United Kingdom taxing statute and not “the technicalities of English conveyancing and land law.” In the case of Mrs Scott, for example, the contract provided that the property was to be transferred with “full title guarantee” and “vacant possession” and a transfer in the normal form was executed. 79. Consequently, in my judgment, the appeal should be dismissed on the principal ground that the vendors acquired no more than personal rights against the purchasers when they agreed to sell their properties on the basis of the purchasers’ promises that they would be entitled to remain in occupation. Those rights would only become proprietary and capable of taking priority over a mortgage when they were fed by the purchasers’ acquisition of the legal estate on completion, and then Cann would apply, with the effect that the acquisition of the legal estate and the grant of the charge would be one indivisible transaction, and the vendors would not be able to assert against the lenders their interests arising only on completion. An indivisible transaction? 80. It follows that the question whether the decision in Cann that conveyance and mortgage are one transaction also extends to include a case where the equitable interest is said to arise at the time of the contract of sale does not arise. If I am right on the main point, it is not easy to see how this question could arise in any future case, but I propose to express my view on it because it was the main question canvassed in the courts below and on this appeal. Page 25 81. The vendors say that Cann did not decide whether the indivisible transaction analysis applies where the equitable interest of the occupier arises on exchange of contracts, and that the answer is that the analysis does not apply. The lenders say that, even if an equitable interest arose on exchange of contracts, in any event the House of Lords has already decided that not only were the conveyance and the charge part of one indivisible transaction, but also that the contract (which had been exchanged some weeks before), conveyance and charge were indivisible. It is therefore necessary to consider whether (and if so, how) this point was dealt with in Cann. 82. The argument for Mrs Cann was that she had an interest from the time of exchange of contracts for the acquisition of 7 Hillview: her “equitable interest must have commenced not later than 20 July 1984, when a specifically enforceable contract for the purchase of 7 Hillview was entered into” (at p 66). Lord Oliver assumed (at p 89) that prior to completion George was estopped by his promise to keep a roof over her head from denying her right as against him to terminate her occupation of the property without her consent, but that is a reference to the estoppel which arose on the acquisition of 30 Island Road (as the reference to it not binding the Nationwide Building Society shows). He then goes on to say that Mrs Cann had acquired no rights in 7 Hillview prior to completion because she had not been a party to the contract for its purchase, and at the stage prior to its acquisition “she had no more than a personal right against him.” Later on he gives a hypothetical example which may suggest that he thought that the relevant reliance by Mrs Cann would have been vacating 30 Island Road rather than merely agreeing that it be sold. It is possible that Lord Jauncey (at p 95) looked at the matter in the same way. 83. There are two inter-linked questions involved in this analysis. The first question was whether Mrs Cann had any rights at all against George in relation to 7 Hillview (as distinct from her rights in 30 Island Road) at the time of the contract. The second question was whether the contract, conveyance and legal charge were one indivisible transaction. I have already said that Lord Oliver and Lord Jauncey expressed the view that if Mrs Cann had rights against George in relation to 7 Hillview from the time of the contract, they were only personal rights. On the facts of that case it seems to me that the relevant reliance would have been agreement to the sale of 30 Island Road rather than ceasing occupation of the house on completion of the purchase of 7 Hillview. 84. In Nationwide Anglia Building Society v Ahmed (1995) 70 P & CR 381 A agreed to purchase a business, including some premises in Bradford, from B for £160,000. B was to retain the use of the property until the whole of the principal money and interest due under the agreement had been paid. A raised Page 26 £80,000 by way of a secured loan from Nationwide and this was paid to B. The balance of £80,000 was left outstanding and secured by a second charge in favour of B against the property. The agreement, the transfer of the property, and the charges were all executed on the same day. A failed to pay B the balance of the purchase price and fell into arrears on the mortgage repayments. In possession proceedings by Nationwide, B sought to defend on the basis that he had an overriding interest in priority to Nationwide’s charge, namely (1) his vendor’s lien; and/or (2) the right to occupy given by the purchase agreement until payment of the price in full. The Court of Appeal decided that there was no vendor’s lien, primarily because it was given up in consideration of the rights to a second charge and occupation of the property until payment. It also decided that the right to occupy was purely contractual and gave rise to no interest in the land. But it was also decided that B did not have an overriding interest in any event, because, applying Cann (per Aldous LJ at p 389): “the charges, the agreement and the transfer were all signed on the same day … Thus, [B’s] right to occupation under clause 6, did not accrue prior to the creation of [Nationwide’s] charge. In Abbey National Building Society v Cann the House of Lords … concluded that when a purchaser relied on a building society, such as [Nationwide], to enable completion, the transactions involved were one indivisible transaction and, therefore, there was no scintilla temporis during which the right to occupation vested free of [the] charge. The same reasoning is applicable to the facts of this case. On June 1, the contract, the transfer and the legal charges were completed. They formed an indivisible transaction and there was no scintilla temporis during which any right to occupation under clause 6 of the agreement vested in [B] which was free of [Nationwide’s] charge. Thus, the right given by clause 6 did not provide an overriding interest under section 70(1)(g) of the 1925 Act, even if the right was a proprietary right. [Counsel for B] submitted that that conclusion ignored the reality of the position and that at all times [B] was in occupation. However that submission ignores the reality of the legal position. [B] gave up his right to occupy as an unpaid vendor by signing the agreement and thereby obtained permission to occupy, which permission did not take effect prior to [Nationwide’s] charge.” 85. In my judgment the decision of the Court of Appeal in Nationwide Anglia Building Society v Ahmed (1995) 70 P & CR 381 was correct. As a matter of principle, Aldous LJ was right to take the view that it is implicit in Cann that contract, conveyance and mortgage are indivisible. In the present case, as in Page 29 93. I agree with the Court of Appeal that the judge was entitled to take the view that any argument about the relevance of the lenders’ knowledge of the promises made by the purchasers as to the right of the vendors to remain in occupation after completion fell within the third preliminary issue, on which there has been no appeal. 94. I would therefore dismiss the appeal. I would only add that I express the hope that the lenders will, before finally enforcing their security, consider whether they are able to mitigate any hardship which may be caused to the vendors. LADY HALE 95. I am reluctantly driven to agree that this appeal must fail for the reason given by Lord Collins: the purchaser was not in a position either at the date of exchange of contracts or at any time up until completion of the purchase to confer equitable proprietary, as opposed to merely personal, rights on the vendor. But this produces such a harsh result that I would like to add a few additional words of explanation. Given that conclusion, the second question discussed by Lord Collins, which is whether the contract should be seen as an indivisible transaction with the conveyance and the mortgage, does not arise and is unlikely ever to arise. However, I must also explain why, with great respect, I take a different view from Lord Collins on that question. Overriding interests: some preliminary remarks 96. It is important to bear in mind that the system of land registration is merely conveyancing machinery. The underlying law relating to the creation of estates and interests in land remains the same. It is therefore logical to start with what proprietary interests are recognised by the law and then to ask whether the conveyancing machinery has given effect to them and what the consequences are if it has not. Otherwise we are in danger of letting the land registration tail wag the land ownership dog. 97. It is also important to bear in mind that we are here concerned with events which took place before title to the land was registered in the name of the nominee purchaser. There is, of course, as Lord Collins says at para 25, an important public policy interest in the “security of registered transactions”. But that does not mean that the fact that a transaction is registered should automatically give it priority over all other interests. The land registration scheme accepts, as did the system of unregistered conveyancing, that there are some interests in land which deserve protection from later dispositions Page 30 even if they are not protected by registration. There is also an important public policy interest in the accuracy of the register, so as to justify the reliance which later purchasers and mortgagees place upon it. 98. Thus the basic rule in section 28(1) of the Land Registration Act 2002 is that “Except as provided by sections 29 and 30, the priority of an interest affecting a registered estate or charge is not affected by a disposition of the estate or charge”. By section 28(2), it makes no difference whether either the interest or the disposition is registered. Section 29(1) goes on to state: “If a registrable disposition of a registered estate is made for valuable consideration, completion of the disposition by registration has the effect of postponing to the interest under the disposition any interest affecting the estate immediately before the disposition whose priority is not protected at the time of registration.” Section 29(2)(a)(ii) provides that among the interests protected for the purpose of subsection (1) is an interest which “falls within any of the paragraphs of Schedule 3”. Falling within paragraph 2 of Schedule 3 is “An interest belonging at the time of the disposition to a person in actual occupation, so far as relating to land of which he is in actual occupation”. This is subject to a number of exceptions; the only relevant one for our purpose is “(b) an interest of a person of whom inquiry was made before the disposition and who failed to disclose the right when he could reasonably have been expected to do so”. 99. It has never been in dispute that Mrs Scott was in actual occupation of the property at the time of the disposition to the nominee purchaser (and the contemporaneous mortgage to the lenders). Nor is it disputed that no inquiries were made of her personally before the disposition. So the only question in this case is, and has always been, whether she had an “interest” which belonged to her at the time of the disposition. 100. Of course, the whole idea of overriding interests is unpopular with those who would like the register to be a complete record of everything which will affect the estate or charge that they are acquiring. But it has always been recognised that the register cannot be a complete record and that there are some unregistered interests which require and deserve protection. The 2002 Act did reduce the list of overriding interests from that contained in section 70(1) of the Land Registration Act 1925. But the rights of those in actual Page 31 occupation of the land remained on the list. Pejorative adjectives such as “notorious and much-litigated” do not assist the argument in this case. 101. Perhaps the most “notorious” example of litigation about the rights of those in actual occupation was Williams and Glyn’s Bank v Boland [1981] AC 487. In that case it was held that the beneficial interest of a wife who had contributed to the purchase of the matrimonial home in which she lived when her husband mortgaged it to the bank was an overriding interest within the meaning of section 70(1)(g) of the 1925 Act. As Lord Wilberforce (with whom Viscount Dilhorne, Lord Salmon and Lord Roskill agreed) pointed out, in registered conveyancing, the fact of occupation takes the place which actual or constructive notice occupied in unregistered conveyancing: “In the case of registered land, it is the fact of occupation that matters. If there is actual occupation, and the occupier has rights, the purchaser takes subject to them” (p 504E-F). Later on, he repeated that “the doctrine of notice has no application to registered conveyancing” (p 508E). 102. It follows from that, and is clear from the wording of paragraph 2(b) of Schedule 3 to the 2002 Act (para 98 above), that the question of whether or not it was reasonable to expect the purchaser or lender to make inquiries of the person in actual occupation is irrelevant. The only question is whether they did so and what the answer was. It is worth emphasising this point, because it is to be expected that the vendor of residential property will be in occupation of it at the time of the disposition, and so there is nothing to give the purchaser or lender constructive notice of any other interest that she might have. But that is not the point. If the vendor does have an interest in the land, other than the one of which she is disposing, and a tenancy by estoppel could be an example, then the fact of her occupation at that time makes it an overriding interest. 103. Williams and Glyn’s Bank v Boland did cause some consternation in some quarters at the time. The Law Commission devoted a whole report to the implications (1982, Law Com No 115), but their recommendations were not enacted. It was discussed in their third report on Land Registration (1987, Law Com No 158), where a constructive way of balancing the competing interests involved was proposed. That solution too did not find favour with the legislators. Nevertheless, the overriding interests of those in actual occupation survived into the 2002 Act. The lending world had meanwhile learned to live with Boland, mainly by insisting that matrimonial homes were conveyed into the joint names of husband and wife. There is no warrant at all for seeking to cut down the scope of overriding interests by giving them a narrower interpretation than they would otherwise have under the underlying law of property. Page 34 legal logic in the ratio in Piskor’s case. Nevertheless, I cannot help feeling that it flies in the face of reality. The reality is that, in the vast majority of cases, the acquisition of the legal estate and the charge are not only precisely simultaneous but indissolubly bound together. The acquisition of the legal estate is entirely dependent upon the provision of funds which will have been provided before the conveyance can take effect and which are provided only against an agreement that the estate will be charged to secure them.” In Cooke, the mortgage was the day after the conveyance and there was no evidence that they were one and the same transaction, or that the advance had been handed over to the vendor rather than the purchase being initially funded in some other way, although the mortgage was applied for before completion. It may be that the conveyance and the mortgage were in fact indivisible. It may be that they were not. Cooke was not cited to their Lordships in Cann, but it must have been known to them, because it features prominently in Piskor, and it was not overruled or even mentioned in their opinions. 111. But that is by the way. None of this scintilla temporis debate would have been necessary if the purchaser of land had been capable of creating a proprietary interest in that land before completion, which would be binding upon a lender whose mortgage could only be granted on or after completion. And if a tenancy cannot be carved out of the equitable interest which the purchaser has before completion, it is hard to see how the sort of beneficial interest which Mrs Rosset was claiming could be so carved out. So it is odd, to say the least, that the House of Lords appears to have assumed that it could. In any event, we are here dealing with a promise which is much closer to a tenancy by estoppel than to the sort of beneficial interest claimed by Mrs Rosset. My provisional conclusion, therefore, is that under the ordinary law of property the nominee purchaser in this case could not give Mrs Scott a tenancy which would bind the lenders in this case before her purchase of the land was completed. 112. How does this provisional conclusion sit with the scheme of the Land Registration Act 2002? Sections 28 and 29, dealing with priority, refer to interests “affecting the estate” (see para 98 above). The interests which are “protected” for the purpose of section 29(1) are interests affecting the estate immediately before the disposition in question, in this case the mortgage. Section 132(3)(b) makes it clear that “references to an interest affecting an estate are to an adverse right affecting the title to the estate …”. In other words, there has to be an estate before there can be an interest which affects it. The 2002 Act does not define “estate” but “legal estate” has the same Page 35 meaning as in the Law of Property Act 1925, section 1(1) of which contains the most basic rule of English land law: “The only estates in land which are capable of subsisting or of being conveyed or created at law are – (a) An estate in fee simple absolute in possession; (b) A term of years absolute.” The interest of the purchaser before completion, however it may be characterised, is not a legal estate. Hence the nominee purchaser could not create an interest which was capable of being a protected interest for the purpose of the 2002 Act until she had acquired the legal estate. This is entirely consistent with and confirms the provisional conclusion reached earlier. 113. There is a further complication. There is a gap between any transaction and its registration. The 2002 Act, confirming Cann on this point, makes it clear that the relevant date, when the person must be in actual occupation and have a proprietary interest in the land, is the time of the disposition over which priority is claimed: see Schedule 3, paragraph 2. Any unprotected interest affecting the estate immediately before the disposition is postponed to the interest under the disposition: see section 29(1). The relevant disposition for this purpose is the mortgage. But neither the mortgage nor the transfer to the purchaser can “operate at law” until they are registered: see section 27(1). Until registration, the purchaser (and indeed the mortgagee) have only equitable interests. This might suggest that rights granted by the purchaser to an occupier could not be “fed” until registration. However, this is machinery, not substance. Assuming that all relevant registration requirements are met, the purchaser has now acquired an absolute right to the legal estate (and the mortgagee an absolute right to the charge). Her interest is of a different order from that of a purchaser before completion, who has the contractual right to have the property conveyed to her but may never in fact get it. 114. Were there to be a scintilla temporis between the conveyance and the grant of the mortgage, the vendor’s tenancy by estoppel would indeed become an overriding interest. But it has not been argued in this case that Abbey National Building Society v Cann was wrongly decided. It has been accepted that, at least in the standard case where completion and mortgage take place virtually simultaneously and the mortgage is granted to secure borrowings without which the purchase would not have taken place, completion and mortgage are one indivisible transaction and there is no scintilla temporis between them. We have been invited to distinguish Cann but not to bury it. Page 36 Are contract, transfer and mortgage indivisible? 115. That simple analysis is sufficient to determine this case, without any resort to the much more controversial proposition that, not only are the conveyance and the mortgage one indivisible transaction for this purpose, but they are now to be joined by the contract as well. Whatever one’s view of the decision in Cann (and Lord Oliver acknowledged, at p 92, that the contrary view had “an attractive … logic” to it) it does make sense. The conveyance vests the legal estate in the purchaser who instantly mortgages it to the lender. All the purchaser ever acquires is the equity of redemption. But that may not be true if the mortgage takes place sometime after the conveyance: there may be a period during which the purchaser owns the land without encumbrances. Not all conveyances and mortgages are indivisible: it depends upon the facts, which is why Cooke may not have been wrongly decided. 116. The lender is not a party to the contract to sell the land to the purchaser. This is an entirely separate matter between vendor and purchaser in which the lender is not involved. These days it may well take place on the same day as the conveyance and mortgage but it often takes place days, weeks or even months beforehand. In the olden days, it was common for vendor and purchaser to instruct the same solicitor. But that is no longer permitted, as it is recognised that they may well have a conflict of interest. The vendor may not know, and certainly has no right to know, how the purchaser proposes to fund the purchase and whether or not it is planned to mortgage the property immediately on completion. Indeed, the purchaser, perhaps particularly a corporate purchaser, may not know precisely where the money is coming from at the time when the contract is made. There may be a variety of options available and the choice between them not yet made. 117. Under the Law Society’s Conveyancing Protocol (the current edition was published in 2011), the purchaser’s solicitor should check whether the purchaser requires a mortgage, whether a mortgage application and offer have been made and whether any conditions remain to be performed. It is only sensible to do so before the purchaser client is legally committed to the purchase. The vendor obviously also has an interest in knowing whether the purchaser will be good for the money. The Protocol advises the vendor’s solicitor to request details of the purchaser’s funding arrangements before exchange of contracts, but the purchaser’s solicitor cannot disclose the information without the client’s consent. The Protocol simply advises him to consider recommending disclosure. Even if the vendor does know that the purchaser proposes to borrow money to fund the purchase, she will not know the precise terms of any proposed mortgage. Indeed the purchaser may not know them at the time of the contract. Mrs Scott did not know that the nominee purchaser proposed to mortgage her home to the Bank, nor did she