BRR e-alert: The power of equity
A story of a developer, some overseas investors, a bust insurer and other creditors
Vernon Dennis discusses the case of Eason and Sanders (the liquidators of Alpha Student (Nottingham) Limited vs Wong  EWHC 209 CH,) where Howard Kennedy acted for both the liquidator and the purchasers of apartments that had failed to be built following the insolvency of the developer. It is an unusual and interesting case highlighting the courts use of 'ancient' equitable doctrines to provide solutions to modern problems.
Property developers find many innovative ways to fund developments. A not uncommon method is to enable the use initial purchaser's deposits to cover early phase work, with a commercial lender providing development funding once an agreed percent of sales have been secured and the development fully costed. The use of a deposit paid to the seller's solicitors as agent and released on exchange of contract in this way is obviously a significant risk to a purchaser, but can be mitigated by insurance/the issue of a performance bond.
Such a scheme was proposed to a large number of individual overseas investors who each entered into agreements for the lease of an apartment within a student accommodation block to be constructed by a developer, Alpha Students (Nottingham) Limited. Each purchaser paid a 50% deposit on exchange of contracts, and agreed to its release to the developer; the repayment obligation, should notice of non-completion be issued by the developer, being backed by an insurance policy.
A number of unforeseen problems emerged, third party commercial funding was not obtained and the development did not proceed. Furthermore, by the time the developer gave notice to the purchasers that they would be unable to complete, a large proportion of the £3.5m deposit had been utilised and, disastrously for the purchasers, the insurance company who had provided each purchaser with cover, had itself entered into liquidation and was unable to meet claims. The collapse of the scheme caused the insolvency of the developer company and its liquidation.
A purchaser who has provided a deposit to a seller has, as a matter of law, a lien against the seller's property by way of equitable charge. In this case each purchaser's right to a lease was also protected by way of a unilateral notice registered at HM Land Registry against the developer's title.
The first problem facing the liquidators was the inability to sell the site (the company’s only asset) due to the presence of the unilateral notices. After securing a potential sale to a buyer at £1.125m, the liquidators were successful in their application to court for an order directing the Land Registrar to remove the notices. In doing so it was held that the buyer's rights over the seller's property would therefore transfer to the sale proceeds.
Post-sale of the site, in the second application, Eason and Sanders (the liquidators of Alpha Student (Nottingham) Limited vs Wong  EWHC 209 CH), the liquidators applied for directions as to how to distribute the sale proceeds. The purchasers were separately represented by Counsel and argued that their lien gave them security and priority over other unsecured creditors of the developer company. A further issue on which the liquidators sought determination was whether there was any priority as between the various purchasers, determined by when the contract was exchanged in time (first in, first out) and/or when the unilateral notice was filed; or whether, as between the purchasers, the distribution should be pari-passu.
The liquidators representing the creditors of the company as a whole argued that as the apartments had never been built, the subject matter of each lien (i.e. the leasehold and property interest) did not exist and therefore the lien was incapable of enforcement. As a result the purchaser held no effective security over the proceeds of sale.
After undertaking a detailed analysis of existing case law, which fell short of determining whether a right of lien existed over an as yet unbuilt property/leasehold interest, Mr Justice Arnold held that it was not necessary for the property interest to be in existence for the purchasers to possess a right of lien, and that instead such lien would attach to the developer's interest in the leasehold reversion.
The Judge moved on to determine the value for the purchasers' interests as against the sellers' entire interest in the reversion, in this case holding that the purchasers' interests extended to 94.7% of the sellers' interest in the entire development. He went onto hold that each purchaser should be entitled to a distribution on a pari-passu basis.
The case highlights the court's ability to do justice between the various parties by use of equitable remedies. While a pragmatic and practical solution to the current case, the Judge was assisted by the fact that the unsecured creditors in the liquidation were relatively small, the apartments were almost entirely pre-sold and the development contained only a small element outside of the pre-sold apartments. The Judge therefore felt able to apportion value as between the various parties, despite the lack of expert evidence. It is however possible that in other cases, where there are greater conflicting interests between the purchasers and the unsecured creditors as a whole (including any contractors engaged) a similar approach to apportionment could cause significant difficulty.
We would be very interested to hear of any of your experiences. Please do get in touch with our Business Recovery & Reconstruction team if there is anything that you would like to discuss.