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No guarantees?

15 February 10

Why insolvency practitioners should feel able to grant (necessary) warrandice without fear of exposing themselves to personal liability

by Andrew Todd, Rachel Oliphant

Locked doors and empty shelves will continue to feature on Scotland’s high streets in 2010 as famous names pass first into insolvency and then into memory.

Property lawyers meanwhile have to remind themselves again of the effect insolvency has on the sale and purchase of property.

What is the issue?

Today, some insolvency practitioners are wary of granting warrandice as they see it as potentially exposing themselves to personal liability. There may even be confusion between warrandice and granting warranties, especially in cross border transactions. For purchasers however a lack of warrandice may cause the Keeper to exclude indemnity, making the title unmarketable. How can these differences be reconciled?

This article is intended as an explanation of the issues involved with granting warrandice in dispositions when either buying property from, or acting for, a selling insolvency practitioner – in the hope that insolvency practitioners can be comfortable with granting fact and deed warrandice.

What is warrandice?

Warrandice is a personal guarantee by the seller, consisting of four elements (loosely categorised as either a past or future act).

A. Past act: good title

The seller guarantees it owns the property and can validly transfer ownership to a purchaser. In effect, the seller confirms the title is good and not void or voidable and, if registered in the Land Register, it is not subject to any exclusion of indemnity.

B. Past act: subordinate real rights

The seller guarantees the property is not subject to any subordinate real rights such as matrimonial or civil partnership occupancy rights, standard securities, or leases (although it has been argued that leases may not fall within this scope, in practice it is best to assume that they do).

C. Past act: no unusual title conditions unknown to the purchaser

The seller guarantees that the property is not subject to any title conditions, such as real burdens or servitudes, which are unknown to the purchaser, and unusual either generally or in relation to the type and location of the property in question, the existence of which conditions would result in a material loss in value.

D. Future acts of the seller only

The seller guarantees that it will do nothing in the future to prejudice the title sold.

When does it take effect?

Protection against past acts is guaranteed up to and including the date a disposition is delivered (normally date of entry unless settlement is delayed).

Protection against future acts extends in theory from the date of delivery to infinity, but in practice once the original disposition is registered this guarantee will end, as the seller’s ability to influence the title will disappear.

How is warrandice expressed?

Each of the four elements of warrandice are contained within three types of express warrandice, set out in Table 1 and below.

Absolute warrandice

This guarantees a purchaser against loss arising from a defect caused by anyone as a result of any past or future act.

Fact and deed warrandice

This guarantees a purchaser against loss arising from a defect caused by the grantor of warrandice only in consequence of any past or future act.

Simple warrandice

Simple warrandice confirms that the seller will do nothing in the future to prejudice the purchaser’s title.

Can a deed contain more than one type of warrandice?

Yes, depending on the nature of the grantor it is common for two types of warrandice to be combined and expressed in a deed. For example, trustees grant fact and deed warrandice but bind the trust estate in absolute warrandice.

How does insolvency and warrandice affect purchasers?

The purchaser’s only remedy for breach of warrandice is financial (i.e. a claim for damages).

Naturally, the effectiveness of this remedy depends on the seller’s continued existence and ability to pay – yet, barring business recovery, insolvent companies have empty pockets and short shelf lives, rendering the promise of warrandice in practice meaningless.

However warrandice is still needed in the disposition on behalf of the insolvent company because the Keeper may exclude indemnity if there is no warrandice in the disposition. This will blight the title until positive prescription remedies the defect. It is therefore vital that the selling company and the insolvency practitioner grant some form of warrandice.

Can an insolvency practitioner grant warrandice?

Yes he can. An insolvency practitioner is appointed to act as agent of the company and is not normally personally liable for any contract (including any disposition) granted by it on the company’s behalf. An insolvency practitioner will naturally be reluctant to grant absolute warrandice for fear he will open himself to personal liability, but he should be able to grant fact and deed warrandice which covers defects in title caused by his own acts.

It is not unreasonable for the purchaser to ask the insolvency practitioner to confirm that he himself has done nothing to jeopardise the title to the property like granting standard securities or dispositions to other parties, as this is within the insolvency practitioner’s knowledge and control.

The insolvency practitioner is unlikely to grant a letter of obligation, and as the searches the purchaser sees at settlement will not have been brought down to the date of settlement, the purchaser needs the comfort that the insolvency practitioner has not granted any other deeds affecting the title.

Unfortunately, even looking at the title on Registers Direct on the date of settlement does not get us around this problem as the information on Registers Direct shows the title as at the day before settlement. If we had a priority period for searches guaranteeing a clear period of time for registration (like they do in England), this would overcome the problem – but in the race to the register, the insolvency practitioner cannot stand on the sidelines.

What might be an appropriate clause for the sale of a property by an insolvent seller?

“And the [Company] grants warrandice [but excepting from it [detail any leases or other exclusions from warrandice]]; the [Insolvency Practitioner(s)] grant warrandice from fact and deeds only”.

Finally, can the disposition omit mention of warrandice?

No. Warrandice is implied into all dispositions. If you do not deal with warrandice in the disposition, absolute warrandice will be implied if a disposition is for full consideration; fact and deed warrandice will be implied if the disposition is for an undervalue (though how to prove transfer at an undervalue is a trickier matter); and simple warrandice will be implied if the disposition is gratuitous.

Equally, if you fail to specify the degree of warrandice granted (e.g. the disposition states “I grant warrandice”) then absolute warrandice is assumed.

It is always good practice to include an express warrandice clause within a disposition as this will supersede the implied warrandice and provide clarity to sellers, purchasers and insolvency practitioners alike.

Andrew Todd and Rachel Oliphant are professional support lawyers in the Real Estate Team at McGrigors LLP

For charts and diagrams please refer to magazine or download the PDF.

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