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Review Your SQE 1 Practice Records

Examination Timing: 00H04M07S

Oliver purchases Maple Cottage (registered) with the aid of a mortgage advance from CapitalBank. After completion of the mortgage, which was registered correctly, he is approached by a property developer, Clara, who offers him £10,000 for an option to purchase the property at 75% of its value within the next ten years. Oliver grants the option and does not get the consent of CapitalBank. One year later, Oliver defaults on his mortgage and CapitalBank repossesses Maple Cottage and sells it to Emily. Clara subsequently approaches Emily and tries to exercise the option against her. How would you advise Emily?

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Clara's interest in Maple Cottage was overreached on the sale to Emily, and she does not have to transfer Maple Cottage to Clara. Section 104 of the Law of Property Act 1925 provides that when a mortgagee exercises their power of sale, they can transfer the land free from all estates, rights, and interests over which the mortgage has priority. CapitalBank's mortgage takes priority over the option, and therefore Emily takes the property free from Clara's option. The mortgagee's power of sale effectively overreaches subordinate interests, converting them into a right to the sale proceeds. 

Key Point: Under Section 104 of the Law of Property Act 1925, when a mortgagee exercises their power of sale, the sale overreaches subordinate interests, such as an option to purchase, ensuring the purchaser acquires the property free from those interests. The holders of subordinate interests may then claim against the sale proceeds.

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