Journal

Securing thin air: Can property rights arise in houses that were never built?

By on
6

Hardwicke barrister Daniel Gatty explores the recent case of Eason v Wong

In the movies, Tarzan travels the jungle by swinging through the air on lianas (spoiler alert: in reality, rather than the movies, lianas are rooted in the soil at ground level and so would not be much use for swinging from tree to tree.) As property lawyers we are more likely to come across liens than lianas, sadly. And liens usually relate to something solid rather than thin air. But not always.

In Eason v Wong, Arnold J had to grapple with the question whether equitable liens could have arisen in favour of the buyers under contracts to purchase suites in a block of student housing that was never built. While that was doubtless less challenging, and certainly less dramatic, than grappling with a crocodile Tarzan-style, it is hoped that an account of Arnold J’s intellectual grapple may be of more use to the likely readers of this article than any Tarzan-based tale might be. So, at the risk of disappointing some, it is Eason v Wong, not Tarzan that is the subject of this piece.

Eason v Wong — the facts

In 2012 a company by the name of Alpha Student (Nottingham) Ltd (“Alpha”) acquired a site on which it obtained planning permission to build an eight-storey block to comprise 131 suites of student accommodation with retail space on the ground floor. Alpha entered into contracts with a number of investors to sell them leases of student suites within the block, off-plan. Draft leases appended to the contracts referred to floor plans identifying the suite to which the contract related. The investors paid 50% deposits.

After receiving deposits of £3.2m odd, Alpha went into liquidation. All that Alpha managed to do towards building the student accommodation prior to being placed into liquidation in August 2015 was demolish the existing building on the site.

Alpha’s liquidators sold the site for £1.1m odd in June 2016. The question for the court in Eason was whether the investors ranked as secured creditors of Alpha in the liquidation on the basis that they had enforceable equitable liens over the site. At a previous hearing, the court had directed the vacation of unilateral notices over the site to allow the liquidators to sell it on terms that if the purchasers did have equitable liens they be transferred to the proceeds of sale.

Purchasers’ liens generally

The unpaid vendor’s lien is a well-known, although not always well-understood, creature. It arises in favour of a vendor whenever the vendor transfers the property being sold without having received the whole purchase money.

The equitable lien that arises in favour of purchasers for any deposit or part-payment made under an uncompleted contract attracts less attention but is also a long-established feature of conveyancing under English law. (See, for example, Wythes v Lee and Rose v Watson.) The purchaser’s lien is an aspect of, or related to, the equitable interest which a purchaser acquires on exchanging contracts to buy land; it secures the deposit (or other part-payment) monies until the land has been transferred to the purchaser. The lien does not depend on the availability of specific performance; see Levy v Stogdon. It is imposed by the law rather than in the contract so will survive the (lawful) rescission of the contract by the purchaser; see Whitbread & Co. v Watt. However, the lien can be modified or excluded by express or implied agreement of the parties.

The problem in Eason

In Chattey v Farndale Holdings, the Court of Appeal upheld Blackburne J’s conclusion that purchasers’ liens arose over flats in an unfinished block of flats. Construction work was far enough advanced when the vendor ran out of money that the flats to which the contracts of sale related could be identified without difficulty. Liens arose over the freehold interest in the parts of the building comprising those flats even though the contracts were for the sale of leasehold interests under leases which had not been granted. As Morritt LJ observed, however, the question of how to give effect to a purchaser’s lien in cases in which the relevant building does not exist did not arise. It arose in Eason.

In Eason, the defendants were Alpha’s liquidators. They accepted that purchasers’ liens in favour of the claimants would have arisen on exchange of contracts but contended they were unenforceable because (a) the leases had never come into existence and (b) the building was never built.

Arnold J rejected both arguments. As to the non-existence of the leaseholds, because purchaser’s liens do not depend on a right to specific performance, it is not necessary for the legal estate contracted for (leasehold in this case) to exist:

It is sufficient that the vendor has contracted to create the legal estate in question our of another legal estate which does exist and that the legal estate which is to be created is identifiable.

As to the non-existence of the building, a purchaser’s lien attaches to the land which is the subject of the contract, not the land as a whole when the contract only relates to part. So, the claimants had liens over the airspace that would have been occupied by the suites they had agreed to purchase when constructed. It was, thus, no objection that the suites themselves were not constructed. And since each of the purchasers had a lien over a separate parcel of airspace, their liens did not conflict and they could share proportionately in the proceeds of sale.

The court went on to do a rough and ready calculation to ascertain the value of the suites which had been contracted to be sold and the value of the vendors’ interest in the rest of the site in order to calculate the ratio in which the proceeds of sale should be distributed between the vendor’s unsecured creditors and the purchasers with the benefit of equitable liens.

The result appears to the author of this article to be a just one which demonstrates the capacity of the courts to apply nineteenth century equitable principles to the modern world in a way that avoids undue technicality.

Daniel Gatty is a property law specialist at Hardwicke. He is a politics and economics graduate from the University of Manchester who converted into law at City, University of London. He is now recommended as a leading junior for property litigation in The Legal 500.

This article originally appeared as an ‘Insight’ on Hardwicke’s website.

Want to write for the Legal Cheek Journal?

Find out more

6 Comments

Anonymous

Yes but when will the MC raise salaries?

Anonymous

Hopefully soon. The PEP:NQ-pay ratio is abysmal.

Anonymous

Comes to something when the SC are paying more than MC.

Anonymous

The court’s rough and ready calculation seems misguided. What is relevant in determining the amount secured by a lien is not the value of the suites which had been contracted to be sold but the value of the particular parcel of airspace in which the suite was to be constructed. That is what the disappointed purchaser had a lien over, not some hypothetical but unbuilt suite.

Suppose that the planning permission was for a 50-story luxury residential tower, and one of the disappointed purchasers had paid for the 50th story penthouse suite. Plainly if the tower block had been built and the penthouse finished, it would have been worth a considerable amount of money. But if the lien is secured by a parcel of airspace, then that particular parcel may be worth almost nothing, because it may be that no other developer wants to build a 50-story tower, or even that a 50-story tower is completely impractical. If whatever the eventual purchaser of the plot wants to do with it can be done without interfering in any way with the 50-story high piece of airspace, that piece of airspace might be worth absolutely nothing.

Thus the disappointed penthouse purchaser should have less secured by his lien, than the disappointed purchaser of a relatively humdrum ground floor flat, without the use of whose airspace nothing could be built on the plot at all.

Anonymous

Fair enough. But it still doesn’t answer the question of whether on separation Jane would acquire an equitable interest in Tarzan’s tree house.

My view is that clearing up after that chimp all day while her man was out yodelling and wrestling lions should be sufficient to create some form of ambulatory trust in her favour. Particularly as she was – unknown to her – cohabiting with the very rich Lord Greystoke.

D Fameron Esq

We don’t care if you’re driven to dislike.

Don’t you dare say “it’s just not fair”.

Join the conversation