Issues

A number of buyers had entered into separate contracts to purchase leasehold flats in a student accommodation development. They paid the freeholder deposits of 50% of the purchase price for the unbuilt flats, totalling £3.2 million. After demolition of the existing building, no further works were completed and the freehold company was placed into voluntary liquidation. The liquidators then sold the site for £1.125 million.

The purchasers claimed a lien over the unbuilt leasehold flats, to be enforced against the proceeds of sale for the freehold site. Crucially, if successful the purchasers would rank as secured creditors in the freeholder’s liquidation.

The liquidators disputed this argument, contending that such a lien was unenforceable because the building was never built. They argued that, as the leases had never come into existence, specific performance of the sale contracts in relation to each of the flats could not be enforced.

Judgment

The Court found that the purchasers did have equitable liens in the non-existent leasehold flats and these were enforceable against the freehold. There was no requirement that the legal estate (the leasehold title) should exist. It was enough that the seller had contracted to construct the legal estate out of another legal estate which did exist, and that the legal estate to be constructed was identifiable.

The purchasers did have a legal interest in the air-space in which their flats would have been built. It was also held that enforceability of a purchaser's lien is not dependent on the availability of specific performance as a remedy for the purchaser. However, the lien applies only in relation to specific identifiable property.

The liens attached to the subject matter of the contracts (i.e. the leases to be granted) and not the whole of the freehold. The purchasers' interest was therefore calculated by reference to a percentage of the overall development, excluding areas which had not been marketed. The purchasers represented 94.7% of the unsold apartments and therefore were entitled to this percentage of the proceeds of sale of the freehold.

Key considerations

  • Administrators and liquidators of insolvent developers will need to consider potential purchaser's liens in relation to off-plan sales.
  • Purchasers should ensure that the property they are purchasing is sufficiently identifiable to produce a lien.
  • Even if a lien exists, it remains unclear how the purchaser’s interest in the freehold is to be calculated. In this case it was calculated by reference to total number of leases and excluded those which had not been sold or marketed. More complex properties will likely raise more difficulty.