Bankruptcy and Legal Ownership of Land
When bankruptcy occurs, either as result of a petition by creditors or voluntarily, the Official Receiver or a trustee, if one is appointed, (we’ll refer to both Official Receiver and the trustee as ‘trustee in bankruptcy’ for the remainder of this article) will receive all his assets and will hold them for the bankrupt’s creditors.
Any land that is owned by the bankrupt will be included – so purchasing land from anyone who is or has been bankrupt needs some very careful consideration. The way you proceed will rest on whether the land is jointly owned (and whether the joint owner is also bankrupt) or whether it is registered solely to the bankrupt.
How to Tell if Land is Affected by Bankruptcy
When being declared bankrupt there are two broad stages; firstly there is a bankruptcy petition where the creditors or debtor apply for bankruptcy and secondly, there follows a bankruptcy order.
Following a lodged petition, the Land Charges department at the Land Registry must be informed by the court and they will then search through their records to find out whether the debtor is the proprietor of any registered land. If they are, this owned property title will receive a registered Bankruptcy Notice against it. Once this is in place, it will warn any potential purchasers that this proprietor has been affected by a bankruptcy order which could mean that they need to go through a trustee in order to buy.
A Bankruptcy Restriction will then replace each notice once the debtor has a bankruptcy order made against them. This will then prevent any registrations of a transfer in ownership unless a notice is served (for cases with joint proprietors) or the trustee has signed the transfer (when there is a sole proprietor).
In order to find out if the land you are looking at is affected by bankruptcy, you will need to acquire an up-to-date copy of the title. Furthermore, an OS1 search will need performing just before you complete on the purchase to ensure that there have been no further entries since you got the copy of the register. This search provides you with 6 weeks to register the transfer as it is frozen so no further entries can be added during this time.
No Entries are Registered but the Proprietor is Bankrupt?
Because of an inevitable time delay between a bankruptcy petition being lodged and updating of the registers of title, there will be occasions where a property goes unnoticed. Alternatively, shortly after the transaction has been completed, a seller may become bankrupt. As long as the price you are paying for the property is at full market value then it should be OK. You will be reliant on the register of title and the trustee themselves will only be interested in the equity in the property, which should hopefully mean that once the sale has released the equity, they have no further cause for concern with the property.
Should you pay a price that is lower than the full market value and not all of the equity is released, this can cause issues as the creditors aren’t able to get everything they wanted. For 5 years after completion, the transaction can be reversed by the trustee in bankruptcy if the full value wasn’t achieved and the bankrupt’s creditors were affected due to this.
Buying Land from a Sole Legal Owner Who is Bankrupt
The trustee in bankruptcy will possess any land that is owned by a proprietor at the time he is declared bankrupt. The trustee will still remain the sole legal owner even if they are not registered on the legal title as proprietor and they are entitled to have the property transferred into their name. However, this isn’t necessary to perfect the trustee’s title so isn’t often carried out.
This, therefore, means that you cannot purchase directly from the bankrupt sole proprietor and if you do, you will not be registered as the owner by the Land Registry. You must purchase it from the trustee in bankruptcy and will need to obtain a copy of their certificate of appointment and the transfer that has been signed by them (if the property hasn’t been transferred into their name).
Once a bankrupt is discharged (is no longer bankrupt) many people wrongly believe that they are free to buy his land from him, but this isn’t the case. The bankrupt’s assets will not be given back and will remain with the trustee unless they transfer them back. When this asset is land, it is known as re-vesting and if the bankrupt states that this has been carried out you should ask to see evidence of this. The register of title should also have had the bankrupt entries removed too.
Buying Land from a Joint Legal Owner Who is Bankrupt
A trustee will not become the legal owner of the land when there are joint names on the legal title, regardless of whether one or both of the owners are bankrupt. The trustee will only be entitled to equity in the property, such as the money left over from the sale of a property once mortgages have been paid and the cost of the sale has been deducted.
The property ids therefore purchased from the bankrupt(s) rather than the trustee. In essence, it is enough for the purchaser to provide the trustee with a notice that they have bought the property, but it is always recommended to involve them prior to completion to make sure they are happy with the price being paid, thus avoiding the risk of a reversal after the transaction has been made.
Buying from Mortgagee Where the Legal Owner(s) is Bankrupt
The property will generally be repossessed by the mortgage lender when the person who owns the property has a mortgage on it. If this happens, the lender will now be the seller of the property and as long as the bankruptcy occurred after the mortgage was registered, no involvement from the trustee is necessary, regardless of whether the property is registered to one or more people.