Out-Law News 3 min. read
23 Aug 2013, 10:12 am
Dev Desai of Pinsent Masons, the law firm behind Out-Law.com, was commenting as the High Court ruled that 375 tenants of UK Housing Alliance North West (UKHA), a Didsbury-based equity release firm now in administration, ranked as 'unsecured' creditors of the firm for the purposes of insolvency law. This means that it is unlikely that the householders will receive what they would have been owed by the firm once the lease arrangement came to an end.
Each of the householders had sold their home to UKHA for an upfront payment of 70% of the price, and rented the property back from the firm under an assured shorthold tenancy (AST). After renting for 10 years, they would have been entitled to the remaining 30%. They had argued that this payment should be considered an expense of UKHA's administration, which would have meant that it would have been paid back before the administrators could pay out to the failed Icelandic bank Kaupthing under its floating charges.
"One has to feel a little sorry for the vendors," Desai said. "Their claim for 30% of the sale price will rank as unsecured debt which effectively means that it is lost. Many of the ASTs were not due to expire until 2017 and 2018, when UKHA's administration will have been finalised and the company liquidated."
"Purchasers of the properties from [Kaupthing's English subsidiary] KSF will be able to take over the properties subject to the vendors' ASTs, but these new landlords will be free from any claims for the final payments. This is primarily because the contracts of sale did not segregate and protect funds from rents collected over time with a view to paying the final payment. The vendors were, therefore, always at risk of UKHA becoming insolvent with little prospect of receiving the balance of their sale price," he said.
UKHA's business was funded through a secured loan from KSF. As a result of falling property prices during the recession, the business became loss-making and fell into arrears in its interest payments to the bank. In June 2010 the bank, which was itself in administration by this point, appointed administrators to UKHA and sought to enforce its security over the properties.
The judge, Martin Mann QC, said that the final payments were not administration expenses as they related to contracts that were entered into before the administration. Because of this, they had to be ranked as provable unsecured debt, he said. He added that it was irrelevant that the tenants had continued to pay rent into a separate bank account ever since UKHA was placed into administration, as there was no provision in either the sale contracts or the ASTs which would have meant that the rental income did not form part of UKHA's general assets.
"The perspective one is left with on analysis is that far from UKHA gaining an unfair benefit for which it must give value [through the current arrangements], it is solely the AST tenants' occupation rights which are capable of constituting relevant benefits for which value must be given and they, of course, give value by means of the rents ... rather than the other way round," he said in his judgment, a copy of which was seen by Out-Law.com.
"In summary, the UKHA Administrators have been using (turning to account) UKHA's own property (in the form of the rents) rather than the property of others. I acknowledge, or course, that the case might be different had the AST tenants reserved interests in a fund represented by the rents collected over time but they did not," he said.
He added that settling the householders' final payments out of the rental income would "not only be contrary to principle but would also result in great unfairness and ... heretically re-write the parties' arrangements".
This being the case, and the case was not one where "the properties are required because UKHA is continuing to trade in administration", KSF was entitled to enforce its security and dispose of the properties, he said.
"The court undoubtedly reached the correct decision in relation to the treatment of the final payments and the application for permission to enforce the security," said property litigation Dev Desai.
"The final payments were liabilities of the companies which arose out of pre-administration contracts and so were unsecured debts. There was no justification to elevate those debts to administration expenses, to be paid in priority to other unsecured creditors, as the company was not using properties belonging to the vendors for the purposes of the administration. The properties belonged to the company and it was simply collecting the rents under the ASTs as it was entitled to do," he said.
"Equally, the properties were not required to rescue the company – of which there was no prospect – or for a more efficient realisation of their value. Therefore, it was right for KSF to be allowed to appoint a receiver," he said.