A notable event

A recent case involving the conversion of a hotel into flats has demonstrated the importance of protecting a contract at the Land Registry - but it does not guarantee 100% protection.

Background

When you exchange contracts to buy a property, you acquire an equitable interest in that property. To protect that interest, the contract can be noted against the seller's title to the property. Noting the contract ensures that your contract binds anyone else who acquires an interest in that property. In certain circumstances, noting the contract also provides some protection for the buyer where they have paid a deposit to the seller, so that the seller became the owner of the money (as opposed to the seller's solicitors holding the deposit as stakeholder on behalf of both parties until completion).

These issues are particularly important where the seller is a developer selling property off-plan. There will usually be a long period between exchange of contracts and completion, the buyer will pay a substantial deposit to the seller (25% or more of the purchase price) and the seller will put that deposit towards the cost of construction of the property.

Facts

In the case of Williams v Broadoak Private Finance Ltd, the developer had gone into administration during the course of a project to convert a hotel in Birkenhead into flats. During the course of the project, a number of flats had been sold off-plan. The property was charged to Broadoak Private Finance Ltd as part of a refinancing exercise, but not until some of the flats had been sold. Each buyer had paid a deposit of 25% of the purchase price of the flat they had contracted to buy. The administrator applied to court for directions as to which of the buyers, if any, had priority to the sale proceeds from the sale of the development to a third party. The sale of the property was likely to fetch approximately the amount that was owed to Broadoak.

For the purpose of the exercise of considering priorities, the court divided the contracting buyers into three categories. First, category A, were buyers who had noted their contracts against the seller's title before the charge in favour of Broadoak was registered. Second, category B, were those buyers who had noted their contract only after the charge in favour of Broadoak had been registered. Finally, there were some buyers, category C, who had taken no steps to note their contracts against the seller's title.

Outcome

The court looked at the rules relating to the priorities of competing interests in land laid down by the land registration legislation. The category A buyers, who had noted their contracts before the creation of the legal charge to Broadoak, had priority to any sale proceeds from the sale of the development to a third party. However, having registered its legal charge, Broadoak had priority over the category B buyers as their equitable interests arose after the creation of the legal charge. The category C buyers had no protection at all.

Accordingly the proceeds of sale in the property had first to be distributed to the category A buyers, who could expect the return of their deposits and interest to be paid before any proceeds were due to Broadoak. The remaining buyers would be likely to lose their deposits and be left with nothing.

Not as safe as houses

Although a buyer might believe that noting its contract should ensure that any subsequent third party buyer would have to buy the development subject to its contract, this is not necessarily the case. This is illustrated by the similar case of In the matter of Alpha Student (Nottingham) Ltd (in liquidation) in 2015. In that case, the buyers had paid a deposit of 50% of the sale price, and the court said that where there was no reasonable prospect of the development being realised to complete the properties, there was no useful purpose in maintaining the notices of the contracts on the title. Therefore, the court could - and in that case did - order their removal to enable the liquidator to effect a sale of the property to a third party free from the contracts to the buyers.

Conclusion

Noting a contract on the seller's title can provide invaluable protection for a buyer where there are no prior interests, such as a legal charge, that take priority to the buyer's claim under its sale and purchase contract. However, noting a contract is not a panacea to the problems that can arise where a developer becomes insolvent.

Williams v Broadoak Private Finance Ltd [2018] EWHC 1107 (Ch)

In the matter of Alpha Student (Nottingham) Ltd (in liquidation); Eason v Wong [2017] EWHC 209 (Ch)