Beware of deposit payments on “off plan” property purchases

Beware of deposit payments on “off plan” property purchases

The High Court has recently considered a situation where a company had plans to develop a site in Nottingham with 131 flats above a ground floor commercial unit.

Before construction commenced, contracts were exchanged with buyers in respect of most of the 131 flats and each buyer paid a deposit of 50% of the purchase price. Their various solicitors took the usual step of registering the contracts against the seller’s title at the Land Registry. These registrations have the effect of protecting the flat buyers’ interests against the property itself and effectively prevent its sale to anyone else.

The company went into liquidation and the liquidator found a purchaser for the site. The liquidator’s application to the Court related to whether or not the flat buyers registrations at the Land Registry could be validly maintained in view of, broadly, the fact that no construction had taken place on the site and the flats – that were the subject matter of the contracts – were not yet built.

The crux of the issue was that if the buyers’ registrations could be validly maintained, then they would effectively be secured creditors and would be reimbursed from the sale of the development site. If not, then they would just be unsecured creditors in the liquidation of the company – and probably end up with very little.

The Court did not initially come to a decision on the main issue – and a compromise was reached to allow the site to be sold and for the dispute to proceed at a later date with the sale proceeds being protected in the meantime by way of the buyers each having a lien over the sale proceeds. The Court needed to consider, as well as the interests of the flat purchasers, the interests of the general unsecured creditors of the company – who would have been hoping that the flat purchasers’ claims would fail, so that the sale proceeds of the site would be part of the defunct company’s overall assets and therefore available for division amongst all creditors.

At a subsequent hearing, the Court decided that the flat buyers were protected and their liens attached to the airspace that would have been occupied by their individual flats if they had been constructed – so it was essential that the flat contracts related to a specific flat. This was generally good news for the flat buyers as it meant that they were treated as secured creditors and would be paid from the site sale proceeds. There was, though, a complicated calculation of what the flats would be worth so that the correct apportionment of the site sale proceeds could be made. The protection they ended up with was not as extensive as they would have had if their protection had applied to the site as a whole.

So, it is not all good news for people in similar situations to these flat buyers. The prospect of recovery, even for a protected flat buyer, depends on the amount for which a development site is sold and also on the number and value of any other secured creditors – so there is certainly no guarantee that each buyer would recover the whole of the deposit paid.

Some buyers in these circumstances may have some protection under new-build guarantee schemes operated by the National House Building Council (NHBC) and various other alternative providers. These schemes can protect a buyer’s deposit but they are usually limited in amount so that they protect, for example, a deposit of not more than 10% of the purchase price. Clearly, buyers that pay large deposits are considerably more at risk than those who pay the more usual 10%.

Conclusion

The decision in this case gave the flat buyers some protection and a remedy. However, it is clear that “off plan” transactions should not be entered into without a full evaluation of the risks involved and even more clear that larger than usual deposits (i.e. more than 10%) in such transactions should be treated with considerable caution.

(Alpha Students (Nottingham) Ltd (In liquidation) v Eason and another [2017] EWHC 209 (Ch).  Cited as Eason v Wong.