Will the courts order specific performance of a contract for the sale of an interest in land by a seller even though the seller subsequently becomes insolvent? The authorities suggest that the courts will where the seller becomes a bankrupt or is placed in receivership, because the buyer acquires a proprietary interest in the land on exchange of contracts. In such circumstances, the buyer can obtain an order for specific performance to perfect its title if it is willing to pay the balance of the purchase price.
In Bristol Alliance Nominee No 1 Ltd v Bennett [2013] EWCA Civ 1626; [2013] PLSCS 316, the court was asked to order specific performance of a contract by a company that had been placed in administration. Unusually, the purchase price was to take the form of a reverse premium, and none of the authorities cited to the court concerned a price that was payable by the seller.
The company had been trading unsuccessfully on the high street and had persuaded its landlords to enter into an agreement for surrender in return for a reverse premium, which was payable on completion. The company deposited the amount payable to the landlords (but not value added tax also due) in an escrow account pending completion. The parties agreed that the escrow monies would be released to the landlords on completion. However, the company was entitled to reclaim the money if it assigned or underlet the premises before completion took place, or at the end of the contractual term.
The landlords called for completion shortly before the company went into administration. The administrators declined to complete the agreement for surrender, or insisted on doing so on terms that were expressly without prejudice to the question of who owned the escrow money. Consequently, the landlords applied to the court for an order for specific performance. They accepted that they would have to prove in the company’s insolvency for the VAT element of the price, but claimed to be entitled to the escrow money.
The trial judge decided that an order for specific performance would offend the principle that the assets of an insolvent company must be distributed equally among its creditors. He suggested that the landlords should forfeit for non-payment of rent and prove for their loss when the company went into liquidation.
The Court of Appeal took a different view. It ruled that a company remains as liable to an order for specific performance as it would were it not in administration. The landlords had, in principle, been entitled to specific performance before the company went into administration and there was no reason to deny them an order afterwards (even though the escrow monies might ultimately vest in the company, for the benefit of its creditors, were the court to refuse the order sought). The landlords were entitled to settle for what they could recover on completion and the fact that the company was unable to pay VAT was not a reason to refuse the order sought. Compliance with the order would trigger the event that would cause the landlords to become entitled to the escrow money and enable them to provide the solicitors who held it as stakeholders in accordance with the parties agreement with a valid receipt for the cash.
Allyson Colby is a property law consultant
