A claim by a purchaser of a student flat for a share of rental income on liquidation of the freehold owner has failed in Scott Christian Bevan and another (as joint liquidators of Pinnacle Student Developments (Leeds) Ltd) v Valeo USL Ltd and another [2022] EWHC 2327 (Ch).
Marc Horn was one of a number of investors who in 2014 had entered into agreements with Pinnacle for the purchase, off-plan, of 999-year leasehold interests in units in a proposed student development. Around half of the purchase prices were paid by way of deposits and the buyers agreed to allow agents to let the property for a period of five years, with Pinnacle guaranteeing the rent. The purchases were to complete 10 working days after issue of a certificate of practical completion. Pinnacle sold the freehold of the development in June 2016 and took a 999-year headlease. The development was practically completed in August 2017 but sales of 160 units were not completed prior to the forfeiture of Pinnacle’s headlease in July 2018, two weeks before it went into liquidation. The dispute concerned the allocation of almost £400,000 collected in rent from students living in the uncompleted units prior to forfeiture of the headlease.
The investors claimed that they had an interest in the rent in priority to Pinnacle, which had failed to complete the leases. As a result of exchange of contracts, they claimed a proprietary interest in the property which was enforceable against third parties and an equitable lien over the rents which increased by stages as the various conditions for completion were fulfilled.
It was not in dispute that Pinnacle had breached its obligations under the purchase contracts by failing to complete the leases within 10 days of issue of the certificate of practical completion. The investors were entitled to seek damages or specific performance but had not done so and were now unsecured creditors since Pinnacle was insolvent. The units were to be sold with vacant possession on completion, which was inconsistent with a claim for rental income prior to completion and there was no other contractual provision to that effect.
On exchange of contracts common law imposes a relationship of trustee and beneficiary between seller and buyer solely to secure the buyer’s right to a conveyance under the contract on tender of the full purchase price. There is a distinction to be drawn between such a trusteeship and the trust which arises from a payment of some or all of the purchase price where an equitable lien arises in relation to the unit that the buyer has contracted to buy to the extent of the deposit paid plus interest and costs Eason and Sanders v Wong [2017] EWCH 209 (Ch).
In the investors’ case, the lien attached to the 999-year lease of each unit with vacant possession which – after payment of the balance of the purchase price and completion – could be rented out by the buyers. The lien did not extend to any or all of the rental income arising from lettings of the units prior to completion.
Louise Clark is a property law consultant and mediator
