Lenders on notice...

Overview

In this case administrators successfully applied for permission to dispose of a development site, free from both the registered charge and several notices registered by off-plan purchasers of the residential apartments in respect of their sale contracts. Many of the off-plan purchasers had paid a 25% deposit.

The interests of the secured lender and the residential purchasers instead attached to any proceeds to be realised from a sale of the site free of those existing secured interests. The order in which the interests had been registered against the title at the Land Registry was key to establishing the priority given to each of them on a distribution of the sale proceeds. The Court held that, after administration costs had been paid, the three residential purchasers who had registered their interests ahead of the charge would get their deposits back first, together with interest and costs, and the secured lender would rank second, receiving an amount up to the aggregate of the sums advanced, plus interest. The remaining purchasers who had registered their interests after the charge was created, although secured creditors, would rank after the lender in the distribution, meaning it was very unlikely they would receive any money.

Background

The case concerned land known as the Pier Hotel, Hamilton Street, Birkenhead which was owned by Birchen House Limited (BHL). The Pier Hotel was a development property and BHL planned to convert it to 62 residential flats with commercial units on the ground floor. The project got under way but ran into difficulties and, as a result, the secured lender appointed administrators in June 2017.

Several of the flats had been sold off-plan and the majority of the purchasers had registered a notice against the freehold title to the property to protect their sale contracts. The secured lender’s charge was also registered against the property.

Having taken advice, the administrators’ view was that they would achieve a higher sale price for the property if it were sold free from the interests of the lender and the residential purchasers.

The issues

The High Court considered two issues:

• whether the disposal of the property, free of secured interests, was likely to promote the purpose of administration (which in this case was either (i) achieving a better result for BHL's creditors as a whole than would be likely if the company were wound up (without first being in administration), or (ii) realising property in order to make a distribution to one or more secured or preferential creditors), and
• the order of priority of the interests affected.

The outcome

The Court was satisfied that the administrators had explored the possibility of selling the property subject to the secured interests and, alternatively, of building out the project, and that, commercially and financially, these were simply not viable options. This meant that the proposed sale of the property free from those interests was likely to achieve the best result and promote the purpose of the administration.

Following the 2017 decision of Eason v Wong, it was also acknowledged that each of the residential purchasers was entitled to a purchaser’s lien over the property in respect of the deposit they had paid and was a secured creditor.

The Court then had to determine the order of priority for distribution of the sale proceeds. The order in which the various interests had been registered against the title was key in this regard.

There were three residential purchasers whose notices had appeared on the title before the lender registered its charge (they were known as Category A purchasers). The Court held that the Category A purchasers were to be first in line and that, after administration costs had been paid, their deposits were to be returned to them along with interest and costs.

Continuing to observe the order in which interests had been registered against the title, the lender was next in line and entitled to all sums it had advanced – just over £4.4m – plus interest.

However, with the predicted sale price being just over £4.4m, those purchasers who had registered their notices after the lender registered its charge (the Category B purchasers) or had not registered their contracts all (the Category C purchasers) were unlikely to receive anything.

Two of the Category B purchasers had made a written submission arguing that they had exchanged contracts in September 2016, prior to the lender’s charge being completed and registered, and had assumed that their contract was protected with priority from this point. However, their solicitors had not registered a notice against the freehold title in relation to that contract until August 2017, by which time the lender had registered its own interest.

The Court considered the mechanism for priority set out in the Land Registration Act 2002. In short, the basic rule under section 28 LRA 2002 is that in relation to registered estates the date on which an interest is created will govern its priority (a first in time approach). However, this basic rule is subject to qualification: an interest whose priority is not protected will lose its place to a registerable disposition of a registered estate for valuable consideration. Interests whose priority will be protected included registered charges, overriding interests and those interests that are the subject of a notice in the register (whether an agreed or unilateral notice).

The Court noted that in respect of these particular Category B purchasers: “_although the contracting purchasers were originally entitled to priority in respect of their liens over the subsequent charge in favour of the [lender], that priority was lost when their conveyancing solicitors failed to secure the entry of agreed or unilateral notices prior to the entry of the registration of the [lender]'s charge on the registered title_”.

Comment

The case highlights the importance of registering interests promptly at the Land Registry.

Lenders are also likely to be interested in the decision and the potential impact of purchasers’ liens on the monies available for distribution in the event of an insolvency. In this case, only three of the residential purchasers had registered notices ahead of the lender’s charge, but if the remaining 51 had done so and, as a result, ranked ahead of the lender for the purposes of the distribution of sale proceeds, the lender’s recovery would have looked materially different.

From a purchaser’s perspective, the case also highlights the importance of assessing the financial standing of a developer and the protection being offered in respect of any deposit paid when reserving a new-build property that is being bought off-plan.

Williams and another v Broadoak Private Finance Ltd and others [2018] EWHC 1107 (Ch).