Administrators are entitled to sell partly developed property free from secured interests
This case involved a property development where Birchen House Limited ("BHL") purchased freehold land in Birkenhead in order to redevelop it into commercial units and residential apartments (the "Property"). BHL had taken out secured bank loans and entered into off plan residential apartment sales. BHL were underfunded and were unable to pay contractors and as a result administrators were appointed. The administrators sought an order from the court to sell the property unencumbered. This order was granted. The courts further looked at the order of priorities for repayment from any sale proceeds and monies in BHL's bank account. The Bank, which had a legal mortgage and an all monies debenture, would rank behind any apartment purchasers, but only with respect to purchasers who had entered into a sales contract and registered their interest at the Land Registry prior to the Bank's refinancing.
Background
BHL purchased the Property in late 2015 and the purchase was initially funded by Hope Capital Limited and the development was overseen by Goodman Wells Limited, a connected company. To further fund the development, residential apartments were sold off-plan. Each purchaser paid a 25% deposit of the purchase price which was utilised in the development. By September 2016, BHL realised they were under-funded and sought to refinance the original loan with Broadoak Private Finance Limited (the "Bank"). BPFL provided two facilities which were drawn in September and October 2016. The Bank was granted an all-monies debenture and a legal mortgage as security for the loan, which were registered at Companies House and the Land Registry. The Bank advanced a third facility as an extension of the second loan facility and that was drawn in November 2016. After the refinancing, BHL continued to sell apartments off plan. Works were suspended in May 2017 by the builder for non-payment of an invoice. Joint administrators were appointed in June 2017 by the Bank pursuant to its powers as a holder of a qualifying floating charge. The only identifiable asset was the Property and a bank account containing around £6,000.
The administrators made an application to the court under paragraph 71 of Schedule B1 to the Insolvency Act 1986 so as to enable them to dispose of the Property as if it were not subject to any security. The court had to consider whether such disposal was likely to promote the purpose of administration. The court held that selling the Property free of any security interests was the only realistic option as the administrators were unlikely to complete the development themselves or sell the Property subject to the existing interests.
The court also considered the order of priorities of repayment, there were 3 classes of respondents: (i) the Bank, (ii) contracting purchasers who had a purchaser's lien and (iii) Eloquent Developments Limited who had the benefit of an option to acquire two apartments but that option expired in December 2017 (so they had no interest in the Property at the time of the court proceedings). The contracting purchasers were essentially split into 3 categories: (a) those that bought an apartment prior to the Bank's charge being registered and had registered unilateral notices at the Land Registry; (b) purchasers who had registered unilateral notices but after the Bank's charge was registered and all 3 advances had been made to BHL; and (c) purchasers who had not yet registered any interest in the Property at the Land Registry. The court held that the purchasers described in catergory (a) would rank ahead of the Bank and the remaining categories of purchasers would rank behind the Bank in the order of priorities.
Points of note in the REF market
This case is important in the real estate finance market, particularly in the context of refinancing property developments. A lender will rank behind any contracting purchaser of residential property who made a purchase and registered their interest at the Land Registry prior to their refinancing. A purchaser who fails to register their interest, prior to a lender's interest being registered, will rank behind the lender even if the lender had notice of such interest. The key takeaway for a lender is ensuring any security taken over any property is registered at the Land Registry as quickly as possible or that prior ranking purchaser applications are cancelled and re-submitted to allow the lender's security to take priority.