Louise Clark explains how a failure to protect an off-plan purchase by registration spelled disaster for certain investors.
Key points
- Off-plan purchase creates equitable lien which must be protected by registration
- Consideration can be provided by means other than paying the purchase price
- Sale must be subject to the rights of investors to impose a constructive trust in their favour
Failing to protect a property interest by registration can have disastrous consequences, as the High Court has ruled in Fish and another (as joint administrators of Sky Apartments 2018 Ltd) v Sky Apartments 2018 Ltd and others [2022] EWHC 763 (Ch).
The law
Where a flat is purchased off-plan and the purchaser pays a deposit, this gives rise to an equitable lien in respect of the flat or the airspace notionally allocated to it, which is capable of binding a purchaser (Eason and another (as joint liquidators of Alpha (Student) Nottingham Ltd) v Wong [2017] EWHC 209 (Ch); [2017] PLSCS 89).
Section 29 of the Land Registration Act 2002 provides that, where there is a disposition of a registered estate for valuable consideration, registration of the disposition postpones to that interest any interest affecting the estate whose priority is not protected at the time of registration. Protection is achieved by a registered charge or a notice in the register or by an unregistered disposition which is an overriding interest, including actual occupation.
Paragraph 71(1)-(4) of Schedule B1 to the Insolvency Act 1986 permits the court to order an administrator to dispose of property which is subject to security, free of that security where the court thinks that the disposal of the property is likely to promote the purpose of the administration, provided that the net proceeds of disposal of the property are applied to discharging the sums secured by the security. A purchaser’s equitable lien is a security within paragraph 71.
Background
The case concerned a development site in Newcastle-under-Lyme comprising 273 partially constructed residential units as student accommodation, which were marketed for sale off-plan. Some investors in the development had been granted leases which were registered; others had entered into agreements for lease which were noted on the registered title or protected by unilateral notice; but others who had contracted to purchase an interest failed to register those rights. None of the investors had an overriding interest.
In May 2018, Sky Building Ltd (SBL) transferred to the first defendant (SA2018) registered title to the site as part of a restructuring arrangement between the property developer and his lenders. The agreement was for a sale at market value with an option for SBL to buy back the property. The transfer recorded that the sum of £2.5m had been received by the transferor but there was no documentation to demonstrate that payment had in fact been made, although tax was paid on the sale and a charge redeemed.
SBL went into administration in November 2020, followed by SA2018 in February 2021. In October 2021, the court authorised the sale of the site by the administrator of SA2018 at the then market value of £2.15m. The sale was to be subject to existing registered leases but otherwise free from the interests of those investors with equitable liens, whether or not protected by notice on the register. The question for the court was whether holders of an equitable lien were entitled to share in the proceeds of sale.
The investors argued that the sale to SA2018 in May 2018 was not for valuable consideration, and even if it was then SA2018 had acquired the property subject to the rights of all investors entitled to an equitable lien as beneficiaries under a constructive trust which arose from the transfer.
Consideration
The court was satisfied that the wording in the transfer was not conclusive evidence of payment and that, in all probability, the purchase price had not been paid. However, there were three possibilities that other consideration had been provided for the transfer: i) regardless of whether the sum of £2.5m was paid, the transfer contained an implicit promise to pay that sum; ii) in entering into the transfer, SA2018 had entered into collateral obligations to third-party lenders; and iii) it was implicit in the transfer and surrounding circumstances that SA2018 had assumed responsibility for the property subject to the contractual rights of investors. The court found that SA2018 had provided consideration in each of these respects and each constituted valuable consideration.
Constructive trust
In order for a constructive trust to be imposed, it was necessary either for SA2018 to have purchased the site expressly subject to the interests of the investors or for it to have undertaken new obligations recognising or promising to give effect to those interests (Lloyd and others v Dugdale and another [2001] EWCA Civ 1754; [2001] PLSCS 251). Since the investors could establish neither requirement, there was no constructive trust. The service on investors of notices under section 5 of the Landlord and Tenant Act 1987 by SA2018 did not assist since the notices were given more than two years after the sale and the wording used was insufficient to constitute recognition of the investors’ contractual rights.
Outcome
The court was satisfied that, on registration of the transfer in May 2018, SA2018 took free from the rights of all classes of investor other than the investors protected immediately prior to registration of the transfer by a registered entry or notice and those who had submitted a priority search to which there was a registered disposition during the priority period in accordance with section 29 of the 2002 Act. Those investors alone were entitled to share in the net proceeds of sale of the site. Property practitioners will want to take note.
Louise Clark is a property law consultant and mediator