Use unilateral and agreed notices to help protect your deposit
When you buy an off-plan property, your solicitor will probably register what is called a ‘unilateral notice’ at the Land Registry. It registers your interest in the property and tells the developer and other interested parties (such as a bank) that you have an interest in the property.
In this article, we look at why this is important by setting an equitable lien on the property.
How is your off-plan property deposit safeguarded?
In our last article, I looked at how you can protect your off-plan property investment deposit. In that article, you will have read about the importance of conducting a background check on the developer, ensuring that your deposit is held in a separate account and that your deposit is insured. I also discussed why you should employ the services of a solicitor with relevant off-plan property investment experience.
Doing all these things is essential. One thing that your solicitor will probably do on your behalf is to register a unilateral notice to protect your interest in the development.
How does a unilateral notice work?
When you exchange contracts to buy an off-plan property, the deposit should be paid into the account of the developer’s solicitor. The developer can then use the money as collateral against a financing loan, or use the money itself, which should then be protected by insurance. Work on the development is then able to start, and your investment property is built.
By placing a unilateral charge on the property, your solicitor establishes an equitable lien on the property. Should the developer go into liquidation, this equitable lien gives you a right to possession until your debt has been repaid.
Do unilateral notices work?
A unilateral notice helps establish your rights as a buyer but could be challenged in the courts. For example, in a case in February 2016, Alpha Student (Nottingham) Ltd. bought a site with the intention of developing 131 residential units on it. The developer sold most of the properties off-plan, taking 50% deposits (yes, I did say 50%!). The buyers’ solicitors registered unilateral notices.
Unfortunately, the developer went bust before starting construction. The liquidators found a buyer for the site and applied to the court to establish whether the buyers had an equitable lien. The court decided that the unilateral notices should be removed to let the sale proceed. It ruled that in this case the claim over possession should be transferred with the sale proceeds and that the unilateral notice was not essential to creating the equitable lien.
At this point, you might be thinking that the unilateral notices failed. After all, the court removed them. However, in its judgement, the court judged that the buyers did, indeed, have an equitable lien. They had a legal claim on the sales proceeds, as secured creditors, and as such was entitled to a pro rata share of the sales proceeds. While this didn’t cover their deposit in full, this is a because of the size of the deposit paid and not because of the legal basis of the unilateral notice and subsequent equitable lien.
Is there an alternative to unilateral notices?
While it’s standard practice for your solicitor to register a unilateral notice, the Alpha Student case makes two things clear:
- A court can remove the unilateral notice and allow a sale of a development
- An equitable lien provides definitive protection of the buyer’s interests
First come, first served
When considering unilateral notices, the first that is registered is considered most important. The earlier your solicitor registers the unilateral notice, the better. It is irrespective of the monetary value of the notice.
While offering some protection, the Land Registry isn’t able to get consent from the proprietor of the property (usually the developer). It means that anyone can register a unilateral notice – there is no system of control; thus, the ability of the court to make an ultimate judgement, which may be different in each case.
Is there an alternative to unilateral notices?
There is an alternative to a unilateral notice, called an ‘agreed notice’. There are two types of agreed notices:
- One that is signed by the developer
- One that is backed by evidence of validity (e.g. a court order)
In both cases, the notice must be registered with the Land Registry. Such a notice would prevent the developer selling the site without repaying your deposit first.
What should you do?
Before signing your purchase contract, make sure that you’re happy with the developer and its track record. It’s also essential to ask your solicitor how your deposit is protected before you pay it. As you can see, purchasing off-plan property is more complex than buying an existing home. Don’t do so without the right solicitor who knows this stuff!
Contact one of the Gladfish team today on +44 207 923 6100, and discover how we’ve helped hundreds of investors achieve their financial goals through off-plan property investment – including putting them in touch with (probably) the best solicitors in the business.
Live with passion,