Some apartment buyers ranked ahead of lenders for debt-repayment, says UK court

Out-Law Legal Update | 28 Jun 2018 | 2:47 pm | 3 min. read

LEGAL UPDATE: The High Court in England and Wales has ruled that the interests of some off-plan buyers of unbuilt apartments ranked ahead of lenders when a property developer entered administration. Insolvency practitioners should be aware of unilateral notices registering a purchaser's interest over a property, as this will impact the priority of payments in an insolvency from the proceeds of a sale of property secured by fixed security. Lenders should watch out for purchasers' liens protected by notices registered at the Land Registry when considering their security arrangements when lending to a borrower with substantial property assets.

The Court ruled that purchasers' liens protected by a unilateral notice registered against a property will take priority over a legal charge registered at the Land Registry after the date of the registration of the unilateral notice.

Lenders to property developers should be aware that off-plan sales that have already taken place may give buyers the right to be paid back ahead of lenders if the developer enters an insolvency process. This is the case if the purchasers' liens are protected by being made the subject of a notice registered at the Land Registry. 

Birchen House Limited (BHL) was a special, and single, purpose vehicle which purchased a freehold title property in Birkenhead and sought to develop it into commercial units on the ground floor and residential apartments above. BHL obtained initial funding from a lender and secured further funding by selling the residential apartments off-plan, with BHL accepting a deposit of 25% of the purchase price, which was free to be used to fund the development.

It quickly became clear that the development was underfunded and BHL re-financed and took a further loan from Broadoak Private Finance. Broadoak took an all-monies debenture over BHL and a legal mortgage over the property as security for its loan, both of which were registered at Companies House and then, later, at the Land Registry over the registered title to the property.

Apartments continued to be sold off-plan, but after a number of months a contractor suspended work for non-payment of an invoice, and Broadoak exercised its powers as holder of a qualifying floating charge over BHL and appointed administrators to BHL.

The property was the company's substantial asset. The administrators applied to court for directions as to whether they could dispose of the property as if it were free of security under paragraph 71 of Schedule B1 of the Insolvency Act 1986. There were two issues for the court to determine: 

  • whether the disposal of the property, free of secured interests, was likely to promote the purpose of administration; and
  • if so, what is the order of priority of the securities affected.

The administrators' proposals confirmed that the purpose of the administration was to achieve a better result for the creditors as a whole than would be likely if the company had been wound up or, if that was not possible, to make a distribution to one or more secured or preferential creditors of the company.

The judge said that finishing the building and selling it subject to the existing security was unfeasible, so granted the order to dispose of the property free of the security interests.

The judge then considered the order of priority of the securities which would be affected by the release. There were three categories of purchasers holding purchasers' liens: 

  • category A purchasers were those who had entered into sale agreements with BHL and had registered unilateral notices of their parts of the property before the charge in favour of Broadoak was granted;
  • category B purchasers were those who had entered into sale agreements with BHL and had registered unilateral notices of their parts of the property after the charge in favour of Broadoak was granted and the three advances under the loan were drawn down; and
  • category C purchasers were those who had entered into sale agreements with BHL but who had not yet registered any unilateral or other notice in relation to the property.

The judge ruled that the category A purchasers ranked ahead of Broadoak, but that category B and category C purchasers ranked behind Broadoak. The amount to be paid to the category A purchasers was the amount of their respective deposits, together with interest on that deposit at 5%, and any costs arising under, or connected with, the category A purchasers' respective sale agreements. Broadoak was entitled to repayment of the total sums it had advanced to BHK, together with the rate of interest provided in the loan agreement. It was highly unlikely that there would be enough assets in the estate of BHL to repay Broadoak in full, so the judge did not make further ruling on the payments to be made to category B and category C purchasers.

Stephen Barclay is a restructuring expert at Pinsent Masons, the law firm behind Out-Law.com.