The High Court looked at a case where an unauthorised person entered into a regulated sale and rent-back agreement (SARBA) and whether the successor in title was bound.
Background:
Mr. and Mrs. Orchard were the registered freehold owners of the property until 26 November 2010, by which time they had significant debts secured against it. In 2010, they entered into a SARBA with Red 2 Black Ltd (R2BL), a company owned by the claimant's then-husband, Mr. Chadda. The property was transferred to R2BL for £112,000 (at 70% of its valuation), and the defendants became tenants with a monthly rent of £700. The application to register the transfer was made on 10 February 2011.
However, R2BL was not authorised by the Financial Conduct Authority (FCA) to conduct sale and rent-back business for the purposes of the Financial Services and Markets Act (FSMA) 2000, although Mr. Chadda himself was authorised. The defendants initially paid rent directly to Mr. Chadda.
Following the divorce of Ms. Dhillon and Mr. Chadda in November 2011, shares in R2BL were transferred to Ms. Dhillon. In March 2013, the claimant purchased the property from R2BL for £115,000, less than its estimated value of £170,000 in 2010. Mr. and Mrs. Orchard paid rent directly to Ms. Dhillon from June 2013, which increased to £1,000 monthly in October 2015.
The claimant was later made bankrupt in June 2016. The Official Receiver instructed the defendants to stop paying the claimant rent. The trustee in bankruptcy later removed a bankruptcy restriction on the property as part of a settlement with the claimant. In March 2022, the trustee in bankruptcy removed a bankruptcy restriction which had been imposed over the property as part of the settlement with the claimant.
In May 2022, the claimant served a possession notice on the defendants due to rent arrears and subsequently began possession proceedings. Mr. and Mrs. Orchard counterclaimed, seeking rescission of the SARBA under the FSMA. The County Court ordered that Mr. and Mrs. Orchard give up possession and pay £97,000 in respect of unpaid rent. They appealed.
Decision:
The High Court granted permission to appeal on ground 2 only. The Court concluded that the defendant’s rights under Section 26 FSMA bind Ms. Dhillon as successor in title. The Judge rejected the first ground as Ms. Dhillon’s activities post-2013 did not constitute carrying on the business and so Section 22 was not engaged.
Ground 2 related to Section 26, which was engaged between R2BL and the defendants and the consequences of the transfer of the property to the claimant. The question of whether a Section 26 right constituted a "mere equity" must be determined according to principles derived from the general law. The Court noted that “Read together, Sections 26 and 28 render an offending contract voidable but not void. Property is treated as passing under the contract, subject to the Court's power to grant relief under Section 28.” The Court disagreed with the Brown v InnovatorOne case and held that the right of an "innocent party" under Section 26(2) of FSMA to recover property transferred under an agreement made by an unauthorised person conducting a regulated activity is a proprietary right. This means the innocent party can claim the property back, and not just its value, from the offending party
Where legal land title has been transferred, the Section 26 right to have the property reconveyed was best classified as a mere equity. In Mr. and Mrs. Orchard’s case, this was protected as an overriding interest based on their actual occupation of the property.
There will be a further hearing to consider consequential issues.
Implications:
This case demonstrates that a Section 26 FSMA right is not automatically defeated by a transfer to a third party. This judgement clarified that the defendants’ right to have the transfer set aside under Section 26 is a ‘mere equity’ right for the purpose of the Land Registration Act (LRA) 2002. However, the fact that one party is in actual occupation of the property will turn this ‘mere equity’ into an overriding interest, binding anyone who becomes the registered owner of the property.
This judgement significantly strengthens the rights of individuals who enter into regulated agreements with unauthorised firms under FSMA by clarifying that their right to recover property can extend beyond the initial counterparty and bind subsequent owners. It also provides important clarification on the nature of the rights created by Section 26 FSMA in the context of land registration.