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 liquidators found a buyer and wanted to sell the site.  The liquidators 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 actually 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.  If the case does proceed then, as well as the interests of the flat purchasers, the interests of the general unsecured creditors of the company also have to be considered.  They will be hoping that the flat purchasers’ claims fail so that the sale proceeds are part of the defunct company’s overall assets and therefore available for division amongst all creditors.

(Alpha Students (Nottingham) Ltd (In liquidation) v Eason and another [2015] Case No. 2015-008993 – December 2015).

In the meantime, however, there is obviously doubt and it is a good reminder that “off plan” purchase deposits should be treated with caution.

If you wish to speak to David Kemp regarding any of the matters highlighted in the article, or for any other issues related to a commercial property please contact him on djk@blasermills.co.uk or give David a call on 01494 478 617.