Tom Horton, pupil at 3 Hare Court, summarises the recent judgment Re Alpha Student (Nottingham) Ltd (In Liquidation)  EWHC 209 Ch.
In an important decision for property developers and purchasers, investment or otherwise, the High Court has held that off-plan purchasers that pay deposits upon the exchange of contracts for a lease are entitled to equitable liens in respect of their deposits when the developer and its insurers became insolvent before the building was constructed.
In Re Alpha Student (Nottingham) Ltd (In Liquidation)  EWHC 209 Ch, the liquidators, represented by Navjot Atwal, made an application for the High Court’s determination of whether purchasers, represented by Asela Wijeyaratne, have the benefit of an equitable liens, rendering them secured creditors. For the purposes of the application, the liquidators were directed to represent the interests of the other unsecured creditors.
The purchasers had paid deposits for 999-year leases of particular plots on the proposed development site, which was to be developed into student accommodation. The plots were identifiable by plans and a draft lease attached to the contract of sale, which the purchasers had entered with the freehold owners of the development site, Alpha Student (Nottingham) Ltd (“the Company”).
All of the purchasers had paid a 50% deposit for their respective plots. The Company had received deposits totalling over £3m. The Company later ran into financial difficulties and were placed into voluntary liquidation. The development site never progressed past the demolition of the buildings present before the development began.
The Company had obtained deposit insurance, but the insurer went into liquidation prior to the Company’s liquidation. However, prior to their liquidation, the insurer had entered into an agreement of indemnity with two other companies to indemnify any claims arising from the Company’s original deposit insurance. But, in a rare set of events, the two indemnifying companies had been dissolved and went into liquidation respectively, the latter occurring just eight days after the Company entered liquidation.
The purchasers therefore sought recovery of their deposits. The liquidators accepted that liens arose in favour of the purchasers yet contended that the liens were unenforceable because the leases for each plot had never come into existence and the building, the proposed student accommodation, was never built.
Arnold J held that it was unnecessary for the legal estate, i.e. the lease, to exist; it is sufficient that the Company contracted to create a legal estate (leasehold) out of another legal estate (the Company’s freehold over the development site). It was held that the lien attached to the property identified in the subject matter of the contract of sale, that is: the plot. Arnold J found no difficulty in making this conclusion despite the building never being constructed and recognised that the lien attached to the ‘relevant air space which would have been occupied by the plot when constructed’.
Arnold J’s decision ranks the purchasers equally as secured creditors and they are therefore entitled to a pro rata distribution of the proceeds of sale of the development site, to the proportion of the sold plots, to the extent of their equitable lien (i.e. the value of their deposits).
Please click here to read the judgment in full.