When buying off-plan goes wrong

The phrases “buyer beware” and “if it’s too good to be true, it probably is” are common in the UK. However, many hundreds (if not thousands) of people, whether natives or from abroad, are still enticed by the thought of large capital growth or guaranteed income schemes from off-plan developments. Recent high-profile scandals in Liverpool, Manchester, Nottingham and Sheffield involving developers that are now in administration or liquidation, such as Alpha Student (Nottingham), Fresh Start Living and Pinnacle (Angelgate) have highlighted these issues. In one of these cases, buyers’ “deposits” equating to nearly £27m have disappeared with little more than a hole in the ground to show for it. The case law It would be inappropriate to discuss matters that are still working their way through the legal process, but a number of issues that arise in cases such as this have previously been considered in two matters involving Alpha Student (Nottingham). The background involved the development of an eight-storey block of 131 “student suites” in Hockley, Nottingham. The development was sold entirely off-plan to investors resident abroad in China, Dubai, Hong Kong, Kenya, Kuwait, Malaysia, Singapore and South Africa. The investors entered into agreements for lease and each paid 50% of the purchase price on exchange of such contract. The developer received deposits totalling just over £3.2m. As is fairly standard, the individual investors entered unilateral notices at the Land Registry to protect their contracts. Development of the site did not progress beyond the demolition of the existing buildings before the company was placed into creditors’ voluntary liquidation. The first dispute to come before the Court was In the matter of Alpha Student (Nottingham) Ltd (in liquidation) [2015] Case No 2015-008993, where the liquidator sought directions as to how to deal with the investors’ unilateral notices in circumstances where they had found a buyer for the site. The proposed sale price was £1.125m, which would have meant a deficiency of about £1.89m as far as the investors were concerned. In his judgment, Snowden J considered that the investors should be entitled to assert a purchaser’s lien over the land to secure repayment of the deposit. However, he noted that the liquidator had raised the question as to whether such a lien could exist in circumstances where no construction had taken place. That issue was held pending further argument. However, in relation to the unilateral notices and, applying the decision in Donnelly v Weybridge Construction Ltd [2006] EWHC 2678 (TCC); [2006] PLSCS 231, the judge held that the court could exercise its jurisdiction to direct the registrar to remove the notices to permit the sale to proceed. Snowden J stated: “In this case it does seem to me that the balance of convenience lies entirely in favour of removing the unilateral notices. First because… they cannot be turned into value in any meaningful way… Secondly, because the unilateral notices are not themselves a precondition to the existence of any purchaser’s lien… Thirdly, because the interests of the purchasers must be to ensure that the property is sold so that there is a fund of money from which they can be repaid. And fourthly, the purchaser’s interests will be protected by the ability to argue for a lien over (a part of) the pot of money which is obtained when the property is sold…” Following this decision the development site was sold. The matter came before the court again in Eason and another (as joint liquidators of Alpha Student (Nottingham) Ltd) v Wong [2017] EWHC 209 (Ch), which raised a number of complex and lengthy legal concepts beyond the scope of a short article such as this. However, in brief, the issue determined in this case was the outstanding question of whether the investors had the benefit of enforceable equitable liens, given that the building was never built and their individual leases never granted. If they did, they would rank as secured creditors in the liquidation and therefore ahead of others when it came to distribution of the sale proceeds. In his judgment, Arnold J held: “…there is no requirement that the purchaser should be entitled to specific performance. It follows that it is not necessary for the legal estate in question to exist. It is sufficient that the vendor has contracted to create the legal estate in question out of another legal estate which does exist and that the legal estate which is to be created is identifiable.” He went on to say: “Given that the building was never constructed, the subject matter of each contract was in effect the legal estate in the relevant airspace which would have been occupied by the suite when constructed.” The upshot As a result of this decision the investors had the benefit of enforceable equitable liens and therefore security. The investors were each entitled to a pro rata distribution of the net sale proceeds to the extent of their security. So what can investors do to try and protect themselves from such matters happening to them? While not wanting to teach seasoned investors to suck eggs, the starting point has to be research into the developer in question – do they have track record of delivery? Are they financially secure? The second point is to take independent professional advice – both agents/surveyors (re the market and the developer) and legal (re the contract and any protection that can be afforded to you). Overall, however, the age-old phrases of “buyer beware” and “if it’s too good to be true, it probably is” do still ring true today. Christopher Perrin is a partner and national head of property litigation at Irwin Mitchell LLP