OFF-PLAN CONTRACTS – THE PRIORITY OF SECURITY INTERESTS, AND UNILATERAL NOTICES
This is our fifth blog in a series relating to issues about off- plan developments. The following links will take you to the earlier blogs:
Off-plan investments and the risk of lost deposits
Off-plan investors – do they have security and if so where are they in the queue
Claims arising from failed off-plan investments
Developers, deposits, penalties
There are no doubt many buyer-funded property developments that are completed to the satisfaction of all concerned, and which prove to be a good investment for the buyers. However, the ones that tend to receive more publicity are the schemes where the developer goes into administration or liquidation, and the investors lose substantial deposits.
Buyer-funded schemes started at a time when it was difficult for property developers to obtain development finance. These schemes are funded by buyers in the sense that they pay high deposits which are released to the developer to fund the cost of construction and, in some cases, the purchase of the site. This is in contrast to most property purchases where deposits are held by sellers’ solicitors and only released to the sellers on completion of the purchase.
This blog discusses the limited protection that is available to a purchaser by registering a notice, usually a unilateral notice (“UN1”), at HM Land Registry. This is done, or should be done, immediately after a purchaser has contracted with a developer. In the present context the purpose of the notice is to protect the priority of the security which is created by the contract.
Many developers will be companies that have been formed solely for the purpose of acquiring and developing land. In many cases their only sources of finance will be purchasers’ deposits. When a developer has acquired a site (funded by purchaser’s deposits) it may decide to obtain bank finance, and if by that stage the developer’s title is not burdened by too many unilateral notices a bank may be prepared to offer additional funding in return for a mortgage, or charge, over the development land. The following two common problems can arise in relation to UNIs.
Late registration of a UN1 leading to the loss of priority
Provided a purchaser who contracts with a developer, registers his UNI before the bank registers its charge at HM Land Registry, then the purchaser’s interest (which takes the form of security) ranks in priority to the bank’s interest. In general terms, and in practice, this means that on any sale the purchaser would be entitled to be paid his debt before the debt due to the bank. However, the problem that sometimes arises is that purchasers’ solicitors fail to register UN1s promptly and before the registration of a bank’s charge. This may be disastrous for purchasers if the developer goes into administration or liquidation. After the payment of the debt due to the bank there may not be any funds available for creditors whose interests rank after the interest of the bank.
The risk of cancelling, or agreeing to cancel, a UN1
A contract between a purchaser and a developer may require the purchaser to cancel any UNI in certain circumstances. For example it may require a purchaser to cancel a UNI if the developer wants to create a charge in favour of a bank. The question that arises is whether by doing so the purchaser losses priority. The answer probably turns on the proper interpretation of the cancellation provisions of The Land Registration Act 2003. We do not believe there are any reported cases on the point, but there are persuasive arguments that support the proposition that priority is lost if a UN1 is cancelled. Purchasers’ solicitors should give appropriate advice on the point (eg the position is not clear, and counsel’s advice should be obtained).
Another problem to which cancellation may give rise is in relation to rescission. It is almost a standard term in an off-plan contract that if development has not been completed by a long-stop date then the purchaser may rescind and require the developer to refund his deposit. In some cases contracts may go on to provide that the purchaser is required to cancel any UNI if he rescinds. If he does so he may lose his priority, and to make matters worse he may be unable to obtain a refund of his deposit from the developer.
Off-plan schemes involve buyers taking leases in properties such as apartments, student accommodation, hotel rooms, and self-storage units. They may be marketed as low-cost, but high-yield investments. Although the legal language used is that of routine conveyancing, this often masks complicated transactions, and issues that require careful consideration. The impression of some observers is that purchasers and some solicitors do not appreciate this until it is too late.
Dewar Hogan specialises exclusively in advice and representation in relation to commercial and residential property disputes, including professional negligence claims against solicitors and conveyancers. This includes advising off-plan investors on common issues that arise when a scheme fails. They include the rescission of contracts and claims for the return of deposits; navigation through any insolvency procedures that follow; and collateral claims, including professional negligence claims against investors’ solicitors or conveyancers.
If you are an investor, or you represent a group of investors, we’d be delighted to hear from you: info@dewarhogan.co.uk.