Transfer risk

Citation

Brougham, A. (2002), "Transfer risk", Property Management, Vol. 20 No. 1. https://doi.org/10.1108/pm.2002.11320aab.024

Transfer risk

Transfer risk

Listing the price of property transfers on a register is aiming to make the practice more open. But greater transparency could pose problems for the unwary.

The Land Registry's move last year to note the price shown in each transfer of property was broadly welcomed by the property industry. Finally, there would be more transparency in property transactions both in the residential and commercial sectors.

But transparency has its downsides. As the first transaction prices are registered, one aspect in particular is emerging as a potential trap for the unwary buyer. What happens if the buyer acquires a property that has previously been bought for less than the market value from a company that subsequently goes bust?

For many years, the courts have been able to intervene where property has been transferred as a gift, or at below market value. Under Section 238 of the Insolvency Act 1986, where a company has gone into liquidation or an administrator has been appointed, the court can set aside or reverse transactions. It may require the property to be transferred back to the insolvent company or for that company to be reimbursed for any loss it suffered as a result of the gift or transfer at an undervalue.

Such a requirement could be imposed if the donor company goes into liquidation, or has an administrator appointed within six months of the transfer, or if the property is transferred to a "connected person" (a term that is widely defined) within two years of the transfer.

Suctions 339 and 342 contain similar, but not identical, provisions for transfers by individuals.

Now that buyers are put on notice of previous transaction prices they could be at risk.

For the purposes of the following example, Company A is the company making the transfer at an undervalue; the company receiving the property at the undervalue is Company B; and the company that buys the property from B is Company C.

The difficulty lies in Section 241(2), which states that the court may make an order affecting "a person in whom the property has been vested whether or not he is the person with whom the company in question entered into the transaction". This means a court can make an order against Company C even though it bought the property for full value. It would be unusual for a court to make such an order except where it suspected that C was in some way part of an arrangement to keep the property away from Company A's creditors.

There is an exclusion in respect of any interest that was acquired from a person other than the company and was acquired in good faith and for value. In other words, if C, buys for full value from B but without knowledge of the transfer at an undervalue to B, the court has no power to require C to transfer the property back to A or to make any compensation to it.

Putting a price on it

This is where the problem with the new Land Registry procedure comes in. The price shown on a transfer of a property will appear on the register of title. C, will therefore, automatically have notice of the price shown on the transfer of the property from A to B. If that price, in the absence of an explanation, is significantly below the true market price at the time the transfer was made, C will be put on notice that there may have been a transfer at an undervalue. If it or its advisers fail to make enquires it will, in our view be at risk of the court deciding it was not acting in good faith for the purposes of Section 241 (2), and of a court order requiring it to transfer the property back to A or to make compensation to A to reimburse the undervalue element.

Years ago, the Land Registry used to insert the price at which a property was transferred in the registers of title. The standard conveyancing procedure was to delete the price from the copy entries of the register that was sent to the purchaser's solicitors.

However, at the time, the registers of title were private; only the registered proprietor or somebody acting with the registered proprietor's authority was entitled to office copy entries. Now, of course, the register is open for public inspection. It is good practice to check the price at which the property was last transferred, as a guard against fraud. A purchaser will usually, therefore, have notice of the last transfer price.

This means title to a property that has been subject to a transfer by way of gift or at an undervalue where the price appears on the register of title, is "not good and marketable" for a period of six months or two years, depending on the circumstance, from the date of the transfer.

A prudent buyer or his solicitor should always check the price shown on the register of title. If the last transfer was registered within two years and the price shown seems unduly low, an explanation should be sought. In the absence of a satisfactory explanation, the buyer will need to take care. Although the risk of a problem is small, the defect in title may well mean that the title is not acceptable to lenders. We do not consider that it is usually necessary for a purchaser to obtain a valuation of the property by reference to the last transfer to establish that the price shown was, at the time of transfer, the full value. It is only if the price shown is significantly different from the full value that the court may consider intervening.

A number of things can be done to minimise the problem where there is to be a transfer that is not at arm s length or at full value:

• •

  Do not allow properties to be transferred ostensibly at an undervalue unless there is a very good reason for doing so. Problems can often arise on inter-group company transfers where the transfer may be done at a nominal or book value.

• •

  The price may be excluded from the transfer by having the transfer refer to the consideration being in accordance with the terms of an agreement. In those circumstances we understand that the Land Registry will estimate the value by reference to fees paid. If the top fee of £800 is paid, the Land Registry will refer to the price as being greater than £1 million. This would enable a subsequent purchaser to acquire the property without notice of the undervalue and in good faith in many cases.

• •

  Consider insurance. However, while it is often possible to obtain insurance against a transferor's insolvency where the transferor is an individual, it is not usually possible to obtain insurance against the insolvency of a company.

Antony BroughamRadcliffesLeBrasseur, (Solicitors)5 Great College Street, Westminster, London SW1P 3SJTel: +44 (0)20 7222 7040Fax: +44 (0)20 7222 6208www.radleb.com