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Property Section

Off-plan property development: a risky business

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Eason and another v Wong [2017] EWHC 209 (Ch) – under certain circumstances a lien is applicable to a buyer’s deposits, making them a secured creditor, when a seller liquidates. 

Property development can, of course, be a risky business. When it comes to buying a property off-plan the question arises as to what will happen to the contract deposit if the developer becomes insolvent before the property is built. Thankfully, for most buyers, the risk of losing a deposit is covered by insurance (such as a NHBC Buildmark policy for appropriate residential properties). There are financial limits on the amount of deposit that is covered by these types of policies, typically 10 per cent of the purchase price, subject to a maximum figure. However, some developers of new homes, particularly flats sold off-plan for investment, are now asking for a much higher contract deposit than 10 per cent. 

In our case this month, Eason v Wong, the investor purchasers had all paid a 50 per cent deposit on exchange for 999 year leases of what were described as ’student suites‘ to be contained within a brand new development. In order to protect the deposits the developer had obtained cover from an insurance company. Shortly after the existing building had been demolished and before the new building work had started the developer went into liquidation, and its insurer had gone into liquidation too. The buyers therefore sought to claim that they had enforceable equitable liens in respect of their deposits over the developer’s site so as to make them secured creditors rather than unsecured creditors in the developer’s insolvency. 

Where a buyer terminates a contract due to breach by a seller, the position at law is that in principle it may recover the deposit; and it has a lien over the property agreed to be sold to secure repayment.  This lien is an equitable charge on the property (see, for example, Chattey v Farndale Holdings Inc (1998) 75 P. & C.R. 298). 

The liquidators argued in the present case, broadly, that the liens were unenforceable, the problem being that the buyers’ student suites did not exist as they had not been built and that the lien could not apply to the developer’s freehold interest in the whole site but only to the leases. 

In the High Court, Mr Justice Arnold said (referring to Re Barratt Apartments Ltd [1985] IR 350) that, ‘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. It is immaterial whether the legal estate in question does not exist because construction of the building has not been completed or because construction has not been commenced’. 

However, as to the extent of the lien the Court held that it did not attach to the whole site but only to the subject matter of the contract – effectively the legal estate in the airspace that would have been occupied by each buyer’s property. 

As it applied to this part of the developer’s property (and therefore its value) it was necessary to calculate the value of the part not attributable to the buyers’ properties, which would be available to the unsecured creditors. The buyers were each entitled to a pro rata distribution of the proceeds of sale of the land to the extent of their security. 

The case shows how, in these types of situations, a lien is likely to apply in relation to the buyers’ deposits and to this extent they are secured creditors in relation to the seller’s liquidation. Even so there has to be sufficient value in the property as it stands for this to enable the buyers to recover all of their money.

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