Property Development: Whether investor enjoyed priority over an insolvent developer in respect of rent received (Re Pinnacle Student Developments (Leeds) Ltd; Bevan and another (as joint liquidators of Pinnacle Student Developments (Leeds) Ltd) v Valeo USL Ltd and another – 2022)

Where a developer of student property becomes insolvent, can an investor claim an equitable right to rent received?

The background

Re Pinnacle Student Developments (Leeds) Ltd; Bevan and another (as joint liquidators of Pinnacle Student Developments (Leeds) Ltd) v Valeo USL Ltd and another [2022] concerned a development of student accommodation. The developer entered into liquidation part-way through the development, resulting in contracts having been exchanged with some developers for some units, but construction not completed until after the developer had entered into liquidation.

An issue arose over what would happen to rent received from students on these units, where completion had not taken place before the liquidation. The investor in this claim argued that he – and other investors in the same position – had priority over the developer’s liquidators in respect of rent received on the following bases:

1. In line with the principle that a buyer is equitably entitled to a property following exchange of contracts, the right to rent in this case should be transferred to investors at the same time;
2. That it was inequitable for Pinnacle or the liquidators to rely on Pinnacle’s breaches of contract and benefit from them; and
3. That the right to receive rent was part of Pinnacle’s deal with investors.

The decision

The High Court dismissed the investor’s arguments, finding that investors did not enjoy equitable rights to receive rental income.

The court’s decision was based on key reasons including:

1. An order for specific performance could not be made as Pinnacle was in liquidation. Further, a damages award would have simply been an unsecured debt in the liquidation. Because the balance purchase prices of units had not been paid, the court felt that the investors did not enjoy a right to specific performance;
2. In their contracts, investors had a right to vacant possession but no right to receive rent;
3. No trust existed under the contracts other than the investors’ right to a conveyance; and
4. No equitable liens attached to rental income arose from tenancy agreements entered into after exchange of contracts.

Even though the insolvency of Pinnacle meant that potential damages claims for investors were of limited value, this wasn’t enough to create rights in equity to receive rental income, which was not a part of the investors’ contracts.

Advice and action for landlords

This decision distinguishes an earlier case, also concerning a failed student property development, of Eason v Wong [2017]. In Pinnacle, the investor looked to receive not just the property on completion, but also the right to receive rent after Pinnacle became insolvent.

The contract terms did not offer any protection by way of a right to receive rents, and the court could not therefore make an order to make an award of this nature to investors. This will be understandably disappointing to investors, presenting the need to consider contracts carefully where no provision for rent receipt in the event of insolvency of the developer is made.