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Buying an off-plan property is risky business.

Alpha Student v Eason [2017] EWHC 209 (Ch)

An off plan purchase is one where the property has not yet been built but a buyer agrees to buy a property based on plans, marketing and projections.

This case concerns a purchase of a new build student accommodation by a number of buyers. The developer went bust before they were able to complete the build.

Imagine that you have gone through the process of purchasing an off-plan property, reached the stage of exchanged contracts and paid the deposit but then find out the developer has gone bust and cannot continue building. What happens to your interest in the property?

This case provides the answer, the buyer would have what us called an equitable lien which is a right to possession over the unbuilt property until their debt has been paid. Here the court decided that the buyers all had liens over their parts of the air space relating to their unbuilt student flats.

The court established the collective value of the unbuilt flats and held that the buyers were secured creditors and entitled to pro rata shares from the sale of the site, however this meant that each buyer still made a loss.

Usually once you exchange contracts to buy a new build property, the deposit is paid to the developer’s solicitors as ‘agents’ for the developer rather than stakeholder. The developer can then use the money to progress the work on the build. These deposits are generally protected by a deposit protection scheme but the limit of their cover is often low. In this case not only did the developer go bust but the insurance company did to.

When purchasing a new build it is standard practice for your solicitor to register a unilateral notice at the Land Registry following exchange of contract. This protects your interest as a buyer until completion has taken place. The lesson from this case however is that the unilateral notice was set aside and a court order was required to establish the buyers’ interests.

The alternative to unilateral notices is to register agreed notices as these would prevent the developer selling the site without clearing their debts to the buyers first.

Top tip: Check the financial standing and track record of the developer and ask your solicitor how your deposit is protected.

For advice on matters relating to the purchase of new build properties contact Gemma Wright head of residential property department.