The primacy of prior registration of property interests (Re Birchen House Ltd)

The primacy of prior registration of property interests (Re Birchen House Ltd)
According to Jamie Riley, barrister at Littleton Chambers, this case, where an administrator applied to dispose of property free of various secured interests, highlights the fundamental importance of registering property and security interests in order to determine the priority of such rights under s 29 of the Land Registration Act 2002.

Re Birchen House Ltd; Williams and another v Broadoak Private Finance Ltd and others [2018] EWHC 1107 (Ch), [2018] All ER (D) 90 (Jun)

What are the practical implications of this case?

This case highlights the fundamental importance of registering property and security interests in order to determine the priority of such rights under section 29 of the Land Registration Act 2002 (LRA 2002).

The courts have long recognised the primacy of prior registration even if a creditor registers its security with knowledge of a previously created interest. The only exception to this is where the new security right arises pursuant to an agreement which imposes on the creditor an obligation to recognise and give effect to the existing. Therefore, it is crucial that investors who pay deposits for property developments register notices to protect their equitable charge as soon as possible. Equally, lenders who agree to fund property developments must be alert to any terms in the loan and security documents which could be construed as an obligation to defer to prior incumbrances.

What was the background?

The applicants were the joint administrators of Birchen House Ltd. They applied for an order under paragraph 71 of Schedule B1 to the Insolvency Act 1986 (IA 1986) for:

  • permission to dispose of freehold property which was the subject of various security interests as if those security interests did not exist, and
  • directions as to the application of the sale proceeds

The company was a special purpose vehicle established to acquire and develop the property into commercial units and residential apartments. Funding was initially provided by a loan secured by a debenture and legal charge (which was subsequently re-financed) and a further funding requirement was met by selling the majority of the residential apartments off-plan. Each sale involved payment of a deposit which the company was free to use to fund the development.

Two apartments were the subject of option agreements which had lapsed. The company ran out of funding before the development was completed and the secured loan creditor (B) appointed the joint administrators under its floating charge debenture.

The respondents to the application were B, the party to whom the options had been given (E) and various purchasers who had contracted to acquire apartments off-plan. The application gave rise to two key issues:

  • whether the disposal of the property, free of security interests, was likely to promote the purposes of the administration viz a more advantageous realisation for creditors as a whole than on a winding up or to make a distribution to one or more secured creditors
  • if a sale were permitted, the order of priorities of the secured rights affected

The joint administrators sought orders directing payment of claims in priority over B, identifying the amount owed to B and then payment to B up to that amount. This involved an analysis of the various interests secured against the property.

As to the first issue, one of the purchasers objected to the sale, alleging that the joint administrators had only considered the interests of B and had given no real consideration to the prospect of completing the development which, he claimed, was the best outcome for all creditors.

In response, the joint administrators explained that they could not build out the property without third party funding. They also relied on evidence that a sale with the various security interests intact would result in a reduction of £850,000 in the realisable sale price, because a purchaser would be required to complete the development and comply with the terms of the sale contracts at the specified prices.

On the question of priorities, the joint administrators argued that they were entitled to sell the property free of the option agreements with E on the grounds that they had expired by effluxion of time. With regard to the rights of the purchasers, the joint administrators acknowledged that they were each entitled to an equitable lien over the property following Eason v Wong [2017] EWHC 209 (Ch), [2017] EWHC 209 (Ch), at para [15] per Arnold J. However, only three purchasers took priority over B because they were the only purchasers who had registered their interests prior to registration of B’s charge

What did the court decide?

On the issue of whether a sale should be permitted, HH Judge Hodge QC (sitting as a judge of the High Court) accepted that third party funding was unlikely and that a sale of the property without the release of the secured creditors’ rights was not a realistic option. For those reasons, he held that a sale of the property free of the security would promote the two stated purposes of the administration.

On the issue of the priority of the affected securities, the judge agreed that although E had registered unilateral notices, the joint administrators could sell the property free of the option agreements because they had expired. Therefore, the secured interests which stood to be affected by the application were those of B and the purchasers.

The judge held that the purchasers fell into the following three categories:

  • A—three purchasers who had registered unilateral notices before the registration of B’s charge
  • B—those purchasers, numbering 46, who had registered unilateral notices but after B’s charge had been registered
  • C—five purchasers who had not registered any interest in the property at all

Of those three categories, only the purchasers in category A took priority pursuant to LRA 2002, s 29, because they had registered their notices prior to registration of B’s charge.

The judge considered whether any of the purchasers within categories B and C could be entitled to protection of their liens by way of constructive trust in circumstances where B had notice of the off-plan purchase contracts and, in turn, the equitable liens. Following Chattey v Farndale Holdings Inc (1996) 75 P & CR 298 and Lloyd v Dugdale [2001] EWCA Civ 1754, he held that notice of the contracts and the lien per se was insufficient to effect B’s conscience—to hold otherwise would defeat the legislative policy of fixing priorities by registration. He went on to hold that in order to give rise to a constructive trust, the category B and C purchasers would need to demonstrate that prior to registration of its charge B had taken on an obligation to give effect to P’s lien as a prior incumbrance. On the facts, B had not undertaken such an obligation, and so no constructive trust arose. Therefore, absent the prior registration of the liens by the category B and C purchasers, B’s security rights took priority.

In the circumstances, the court ordered the sale of property and under IA 1986, Sch B1, para 71(2), directed payment of the net proceeds first to the category A purchasers and then to B under its charge. In calculating the net proceeds, the judge directed that the joint administrators’ costs of the application should be included in the costs and expenses to be deducted before distribution of the sale proceeds.

Further Reading

If you are a LexisPSL subscriber, click the links below for further information:

 The administrator and charged property (subscriber access only)

 Administration sales involving property—process and options for a buyer (subscriber access only)

Not a subscriber? Find out more about how LexisPSL can help you and click here for a free trial of LexisPSL Restructuring and Insolvency.

Jamie Riley is a busy and highly respected commercial litigator whose experience covers all types of commercial disputes. His practice encompasses contractual disputes, insolvency and corporate restructuring, fraud and asset tracing, company disputes involving claims against directors and between shareholders, banking and financial services. Jamie is regularly involved in cases that have international elements giving rise to jurisdictional issues.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Related Articles:
Latest Articles:
About the author:

Anna joined the Restructuring and Insolvency team at Lexis®PSL in August 2013 from Berwin Leighton Paisner where she was a senior associate in the Restructuring Team.

Anna has worked on a number of large scale restructurings primarily in the UK market acting on behalf of lending institutions.

Recent transactions include the restructuring of a UK hotel chain and the administration sale of part of the Connaught group. Anna has also spent time on secondment at The Royal Bank of Scotland and trained at Clifford Chance qualifying in 2007.