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Securing thin air

In the movies, Tarzan travels the jungle by swinging through the air on lianas[1].  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 [2017] EWHC 209 (Ch) 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 8 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 (1855) 3 Drew 396 and Rose v Watson (1864) 10 HL Cas 672.  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 [1898] 1 Ch 478.  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 [1902] 1 Ch 835.  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 (1998) 75 P & CR 298, 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.

 

[1] 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.