It has long been established that buyers who pay deposits acquire liens over the land that they are contracting to buy. This protects them if, through no fault of their own, they are unable to obtain the conveyance for which they contracted because the seller defaults.
The lien arises by implication of law in order to do justice between the parties. It is a proprietary right and can be enforced in the same way as an equitable charge: by a sale pursuant to a court order or, where the lien affects a pot of money, by an order for a payment from the fund. In other words, liens provide buyers with security for whatever part of the purchase price they have paid if the seller becomes insolvent.
In Chattey v Farndale Holdings Inc [1997] 1 EGLR 153 the Court of Appeal extended the principle to a buyer who had entered into an agreement to take a lease, which had yet to be granted, over a physically identifiable flat in a newly constructed block of flats. Can the court go further? Is it possible to give effect to a buyer’s lien before any flats have actually been built?
Eason & Sanders v Yiu-Wing Wong [2017] EWHC 209 (Ch) confirms that it is. The litigation was triggered by sales “off-plan” of 131 student apartments in Nottingham. The developer collected 50% deposits from buyers, totalling more than £3.2 million, and then became insolvent before any construction took place. The company’s liquidators applied to the court and were granted permission to sell the property on terms that any liens that the buyers might have over the land should be transferred to the proceeds of sale instead: Alpha Students (Nottingham) Ltd (in liquidation) v Eason [11 December 2015]. The liquidators sold the site for £1.25 million and the parties went back to court to find out whether the original buyers had enforceable equitable liens over the proceeds of sale.
Chattey confirmed that a lien arises in favour of a buyer who has a contractual right (whether present, future or conditional) to call for the transfer to him of the legal estate in land, in respect of all sums paid by him on the faith of that contract and as part of the purchase price. So the liquidators conceded that the original buyers had had equitable liens over the areas shown on the draft lease plans. But they claimed that the liens were unenforceable because the apartments had never been built.
Arnold J disagreed. He took the view subject matter of each contract was the air space that would have been occupied, had the apartments been built. The original buyers ranked equally with each other and were entitled to a proportionate distribution of the proceeds of sale to the extent of their securities.
There was one caveat. Some of the apartments had not been sold when the developer went into liquidation. In addition, the development was to have included ground floor retail space, together with a basement for plant to service the building. The judge ruled that the buyers’ liens did not extend to those areas and that their value (totalling less than 6% of the proceeds of sale) should be available for creditors who were unsecured.
Allyson Colby is a property law consultant
