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Off-plan investors – do they have security, and if so where are they in the queue?

Off-plan investors – do they have security, and if so where are they in the queue?

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When an off-plan scheme fails and the developer ends up in administration or liquidation the investors not only find themselves in unfamiliar territory, but more importantly they face losing substantial deposits. With particular reference to developers in administration this article discusses the security rights arising from investors’ contracts and the position about competing security interests.

If an off-plan development doesn’t work then usually the problem – unless the entire thing is an outright fraud; not unknown – is that the developer runs out of money. This may lead to various convulsions – desperate calls on investors for more money, for instance (or, on the other hand, payments made to investors to keep them on board for longer and perhaps to enable refinancing when the development is delayed), refinancing or, if all these fail, some kind of insolvency process.

The first thing a properly advised investor will have done after exchanging contracts is to register either a unilateral or an agreed notice (for the present purposes identical) at HM Land Registry. An investor’s contract and the registration of a notice will give him two important rights. The contract gives the investor what is variously called a ‘purchaser’s lien’ or an ‘equitable lien’ over the property which is the subject matter of the contract (even if the property is a cube of air!). This lien effectively secures the investor’s deposit. The effect of registering a notice is to give the investor’s security (the lien) priority over rights which are registered subsequently, eg a lender’s legal charge. Like many rights these two rights may be challenged by Administrators (there are invariably two) and/or a party with a subsequent charge who is competing for security over the same asset.

If the purpose of the administration is to secure a better outcome for the creditors than could be achieved by a liquidation then the Administrators may want to dispose of the development, probably to another developer. In the case of a development which has been sold off-plan this is not straightforward. There could be hundreds of investors, and each of them with the benefit of security. If the investors don’t consent the Administrators may apply to the court for an order permitting the sale of the development free of the investors’ security interests. To avoid the unfairness that would otherwise arise from such an order the Insolvency Act provides protection for investors. It provides that the net proceeds of sale should be applied in discharging the sums secured by the displaced security.

Although administrators should be aware of the ability to make an application to the court if they want to dispose of the development free of investors’ securities, in the first instance they may try to obtain the investors’ consent. They may do so in the Administrators’ proposals which should be made within eight weeks of their appointment. Investors who are interested enough, and have the funds, may want to use this period to obtain their own valuation advice so they are in a position to have a constructive discussion with the Administrators.

Putting aside any other security interests, at first glance it might be thought that if unilateral notices were registered at different times that investors would be competing with each other for priority. However, this is probably not the case. If each lien attaches only to the property which forms the subject matter of a contract then no question of competing priorities between liens arises. In that case each investor is entitled to a pro rata distribution of the net proceeds of sale to the extent of his security. The valuation of the extent of the investors’ securities may, of course, be a more difficult question.

Dewar Hogan has for some time been advising off-plan investors in the three stage journey that they tend to take when a scheme fails. The first stage involves the rescission of contracts and claims for the return of deposits; the second stage is navigation through the insolvency procedures; and the third stage involves the consideration of collateral claims for damages, usually against the investors’ conveyancing solicitors: https://dewarhogan.co.uk/dewar-hogan-news/claims-arising-from-failed-off-plan-investments/.  The firm is currently advising investors in relation to various schemes in England, including three schemes being developed by the Elliott Group in Liverpool and Manchester: The Residence, Aura, and Infinity.

If you’re an investor and have any questions we’d be delighted to discuss them. Please call us or send an email to off-plan@dewarhogan.co.uk.