Real property – Insolvency – Equitable lien – Company acquiring site for development as student suites – Individuals contracting to purchase suites and paying deposits – Company being placed in voluntary liquidation before development built – Joint liquidators making application under section 112 of Insolvency Act 1986 – Whether purchasers having enforceable equitable liens over construction site – Application dismissed
The company was incorporated as a special purpose vehicle to acquire and develop a site at 1 Hockley, Nottingham as student suites. There were also plans for ground floor retail space and a basement. After the company acquired the freehold title to the site it entered into contracts for the sale of 999 year leases of the suites to purchasers, all individuals who were resident abroad. The purchasers paid deposits to the company in accordance with the relevant contracts for sale. In each case the deposit consisted of 50% of the purchase price. Each contract provided for the grant of a lease in the form of a draft annexed to the contract which in turn referred to a floor plan showing the suite to which the contract related.
Development of the site had not progressed beyond the demolition of the existing buildings when the company ran into financial difficulties and informed the purchasers that it was unable to complete the development. The company was placed into creditors’ voluntary liquidation and the claimant joint liquidators sold the site for £1.125 million. They applied under section 112 of the Insolvency Act 1986 to determine whether the purchasers had the benefit of enforceable equitable liens over the company’s freehold interest in the site, making them secured creditors. The defendant was joined to represent the purchasers’ interests.
The claimants accepted that equitable liens arose in respect of the deposits paid but contended that the liens were unenforceable because the building was never built, the leases had never come into existence and there was nothing to which specific performance could attach.
Held: The application was dismissed.
(1) The existence of an equitable lien did not depend on the availability of specific performance as a remedy for the purchaser. It followed that it was not necessary for the legal estate in question to exist. It was sufficient that the vendor had contracted to create the legal estate in question out of another legal estate which did exist and that the legal estate which was to be created was identifiable. It was immaterial whether the legal estate in question did not exist because construction of the building had not been completed or because it had not been commenced: Re Barrett Apartments Ltd [1985] IR 350 and Chattey v Farndale Holdings Inc (1998) 75 P & CR 298 followed; Lehmann v BRM Enterprises Ltd (1978) DLR (3rd) 87 and Hewitt v Court (1983) 149 CLR 639 considered.
(2) The lien was confined to the vendor’s interest in the area of land which was the subject matter of the contract and did not extend to any greater areas. Accordingly, in the present case, the liens attached to the subject matter of the respective contracts, namely the leases which the company had agreed to grant; and not to the company’s interest in the site as a whole. Given that the building had never been constructed, the subject matter of each contract was in effect the legal estate in the relevant air space which would have been occupied by the suite when constructed: Chattey v Farndale Holdings Inc (1998) 75 P & CR 298 applied.
(3) No question of competing priorities between the liens arose. The purchasers ranked equally and were each entitled to a pro-rata distribution of the proceeds of sale to the extent of their security.
(4) In principle, the purchasers were each entitled to a pro rata distribution of the proceeds of sale to the extent of their security. The question was how to value the extent of their security given that it did not extend to the vendor’s interest in the parts of the legal estate corresponding to the suites which had not been sold or in respect of which no deposits had been paid, the ground floor retail space and the partial basement. In principle, the vendor’s interest in those parts should be available for the unsecured creditors if it was realistically possible to ascribe any value to that interest.
In the case of the unsold suites or in respect of those which no deposits had been paid, the sale prices and asking prices were known and it was possible calculate a total value of all the suites (£6,803,375) and apportion it between the value of the purchasers’ interests (£6,439,455 or 94.7%) and the value of the vendor’s interest (£363,920 or 5.3%). There was no evidence that the ground floor retail space had any significant value when the company went into liquidation. Unlike the suites, it had not been pre-sold or even marketed. Furthermore, given the small size of the unsecured creditors’ claims relative to the purchasers’ claims, it would be disproportionate for the claimants to have to incur the expense of a professional valuation of the retail space. Accordingly, the value of the vendor’s interest in the retail space might be disregarded. The plant in the partial basement appeared to have been intended to service the whole building, and thus to be benefit all parts of it. It was therefore justified to regard it as having no separate value.
(3) Accordingly, the proceeds of sale of the site, net of costs and expenses, should be divided between the purchasers and the unsecured creditors in the ratio 94.7:5.3. The purchasers’ portion should then be distributed pari passu amongst the purchasers.
Navjot Atwal (instructed by Howard Kennedy LLP) appeared for the claimants; Asela Wijeyaratne (instructed by Howard Kennedy LLP) appeared for the defendant.
Eileen O’Grady, barrister
