Deed of Priorities: If there is no surplus, then you are not entitled to any money

The High Court (HC) was faced with a case where the purchase price was due when the development of the houses was finished.

Background:

Mrs. Burns was, originally, the freehold owner of the property which she sold to Mr. Bridge in May of 2017. Mr. Bridge purchased the property, intending to develop the three houses situated on it. A deposit of only £1 was paid upon the exchange of contracts. The purchase price in the sale contract was however £450,000 and the sale was completed on the 18th of September 2017, although the purchase price was not paid on the date of completion. 

On the said date and as provided for by the sale contract, Mrs. Burns and Mr. Bridge entered into what was described as an "Overage Deed" under the terms of which Mr. Bridge agreed to pay £100,000 upon the completion of each of the three houses, together with a further payment of £150,000. The Overage Deed further provided for an "End Date" of the 31st of July 2018 when the full £450,000 was to be paid in any event. The £450,000 was thus treated as a loan which was repayable by the 31st of July 2018, although the date for payment was subsequently extended together with the accrued interest.

On the 18th of September 2017, Mr. Bridge executed a "second legal mortgage" over the property in favour of Mrs. Burns as security for his liabilities under the Overage Deed. Mr. Bridge obtained a loan facility for the development of the houses from Together Commercial Finance Ltd through a legal mortgage over the property. On the 19th of September 2017, by means of a Deed of Priority, it was agreed that the Together charge should have priority over the second legal mortgage in respect of "lender indebtedness". In 2018, Mr. Bridge refinanced with PFL whereby he obtained a loan facility of £650,000 using the property as security. 

On the 21st of September 2018, Mrs. Burns, PFL and Mr. Bridge executed a Deed of Priorities and Variation, confirming the priority of PFL as the primary lender. On the 29th of March 2019, PFL entered into a further loan agreement with Mr. Bridge which should have been repaid within nine months. On the 10th of April 2019, another Deed of Priorities was agreed upon between the parties in which Mrs. Burns was referred to as ‘the seller’ and PFL as the ‘lender’, while Mr. Bridge was deemed to be the ‘borrower’. 

The 2019 loan was not repaid on time and, in the summer of 2020, PFL sought to sell the development. In January of 2021, PFL took possession of the property as the mortgagee in possession. One house was sold in May 2021 for £450,000, a second in June 2021 for £480,000, and the final plot 2 was sold in July 2021 for £415,000. The total gross proceeds of the sale were thus £1,345,000. There was however a shortfall for PFL and no surplus for Mrs. Burns who claimed that the properties were sold by the defendants under their true value.  

Decision: 

The HC disagreed with the claimant, ruling that, even though Mrs. Burns was not aware of the terms of the 2019 loan agreement, it was still within reasonable contemplation that the terms of the loan were also applicable to the 2019 Deed of Priorities. The deed offer in question offered priority to PFL with regard to all their monies. It was also in Mrs. Burns’ interest for Mr. Bridge to be able to borrow further money in April 2019 to complete the development. 

The claimant succeeded in relation to the construction issue and the statement of account. However, this would still not produce a surplus. The Court however dismissed the claim of undervaluation as the houses were sold at close to the margin of error in terms of the extant market value of the property (12.9%) and PFL did not breach its duty, even though its marketing could have been better. 

Cawson KC observed that the claimant’s witness statement did not comply with Practice Direction 57AC. He concluded that “Mrs. Burns’ witness statement was particularly unhelpful”.

Implications:

The salutary lesson from this decision is that virtually leaving the entirety of the purchase price in the hands of another in the hope of gaining a higher reward is a tricky business, as the parties might be left with no recourse or indeed money if the development does not go as planned. A Deed of Priorities is also a powerful instrument, one which might exclude a party entirely if there is no surplus remaining. It is also extremely important to ask to see all the terms before signing any such agreement. 

This is a lengthy case, one which was very fact-specific, yet it still provides good guidance on topics such as the Deed of Priorities and on leaving the matter of the purchase price to later.