Sale and leaseback – a question of priorities

This article is reproduced from Property PSL by Alan Riley
The North East Property Buyers Ltd Litigation case – [2010] EWHC 2991 (Ch) – involving an alleged sale and leaseback fraud is an interesting decision: it determines that the rights of several allegedly defrauded sellers, arising out of promises made by the buyer to grant leases back of the properties sold, did not arise in the scintilla of time between the sale and contemporaneous mortgage of the properties, but instead ranked in priority behind the mortgagees’ interests and thus did not bind the mortgagees. The case asserts that the county court case of Redstone Mortgages plc v Welch [2009] 36 EG 98 is wrongly decided.
Questions arise, however, over how a sale and leaseback transaction, coupled with a contemporaneous mortgage, should be viewed, and how to ensure that the leaseback element of a sale and leaseback obtains priority over a contemporaneous mortgage granted by the buyer/landlord.
In the North East Property Buyers Ltd Litigation case, Judge Behrens respectfully disagrees with an analysis of a sale and leaseback transaction by Judge Purle in the case of Delaney v Chen & Anor [2010] EWHC 6 (Ch). In that case, Purle J. said: “The tenancy had been granted prior to the 8th May transfer and took effect simultaneously with that transfer, which coincided with the commencement date of the term. Even if the tenancy had been created at the same time as the transfer, the position would have been the same. The transfer and tenancy were indissolubly bound up as part of the same overall transaction. Just as a purchaser dependent on a mortgage never acquires anything other than an equity of redemption (Abbey National BS v Cann [1991] 1 AC 56, in particular Lord Oliver of Aylmerton at 92F-93C) so the buyer in this case never acquired anything other than a freehold reversion.” He continued: “In Redstone Mortgages plc v Welch [2009] 36 EG 98, HHJ Worster held that the registered purchaser under a similar 
sale and lease back transaction acquired nothing more that the freehold reversion, so that the rights of the tenants (who remained in actual occupation throughout) had priority over the rights of the purchaser’s mortgagee. Whilst that decision is not binding on me (Judge Worster was sitting in the Birmingham County Court) I find the reasoning compelling on this point, and agree with it.” Judge Behrens thinks otherwise, pointing out that in a sale, leaseback and charge, although the rights to leaseback are bound up with the sale, the sale is equally bound up with the charge. He says that there cannot in law be a dead heat between two mutually inconsistent and competing interests over a legal estate, and that the solution, following Abbey National BS v Cann, was that the mortgagee takes priority.
This judicial difference needs to be resolved. However, a seller/lessee in a sale and leaseback should not leave the question of priorities to judicial argument. He/she should ensure either that a consent to the leaseback is provided by any known intending chargee of the property, or alternatively, that the buyer/landlord agrees that the leaseback is to be accorded priority on registration over any chargee of the buyer’s interest.
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