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Sale and leaseback – a transaction at an undervalue?


Could the sale and leaseback of a house be a transaction at an undervalue and thus be caught by section 423 of the Insolvency Act 1986? This was the main question considered by the High Court in Delaney v Chen although some other points of interest were discussed.

The background is that the respondents to the appeal – known as “the victims” through the report – had successfully sued a Mrs Chiu and Mr Ding and obtained not only judgment but a respectable costs order. £30,000 of costs was paid, by order, out of money held in court, but on 7th May 2008 an interim order for the payment of a further £30,000 costs was made along with an interim charging order against Chiu and Ding’s home.

Meanwhile Mr Ding was obviously alive to his family’s situation with a large costs order in the offing. He took steps to sell the house as he explained “the sale was done with the best interest of my family retain a roof over their heads and to reduce my debts and outgoings it was not to cheat anyone or deprive any creditors”.

The plan was that the home would be sold for £210,000 to the Mr Delaney, the appellant a property investor and long-time acquaintance of the family, who would lease back the property to Chiu and Ding. Slightly unusually the leaseback happened first. A tenancy for 21 years plus one day was granted on 1st May to commence on the dame day, 8th May 2008 the the transfer of the home would take place.

We are told that the interim charging order had not been drawn up immediately and so could of course not have protected the respondents against the sale of the home.

The respondents solution to this was to make an application for the court to exercise its powers under s.423. on the grounds that the sale and leaseback was a transaction at an undervalue. The District Judge agreed with them and made an ordered that Mr Delaney transfer the home back to the sellers, subject to a charge in his favour for the sum of £160,435.15, the value of a mortgage which had been discharged on the sale of the home.

One of the aims the court strives for in making an order under s.423 is “restoring the position to what it would have been if the transaction had not been entered into”, which was plainly not satisfied, Mr Delaney being out of pocket over £100,000.

The decision that the transaction was at an undervalue seems to have been made on the following basis. The evidence of Mr Delaney’s valuer was accepted without objection. It put the value an unencumbered freehold of the home at £275,000. The judge found that since the tenancy was not assignable it had no value in money or money’s worth and therefore that the transaction had taken place at an undervalue of £65,000.

Clearly from Mr Delaney’s perspective there was a great deal of difference between the unencumbered freehold and one subject to a tenancy for a fixed term of 21 years. At first sight it would seem self-evident that the judge’s reasoning was plainly wrong.

There was unfortunately no direct evidence as to the value of the freehold reversion as against the freehold. The figure given by Mr Delaney’s valuer was £115,000 but on the 16th September 2008 (the wrong date) and even then purely on the basis of the property as a source of revenue, not taking into account the very real possibility of the tenancy ending early. Even so this would indicate, and the High Court accepted, that the valuation of reversion was considerably less than £275,000 and the judge found that £210,000 was a fair value for the reversion.

On appeal the victims argued on the authority of In re MC Bacon Ltd (No 1) [1990] BCLC 324 that the correct perspective for assessing whether a transaction was made at an undervalue was the seller’s not the buyer’s. Before the transaction the seller had a freehold worth £275,000 afterward they had £210,000 in cash (part of which discharged the mortgage of course) and a tenancy worth nothing.

While it is not always true that there is a perfect symmetry in such matters, if I own an asset which is worth a great deal to someone else, I can usually realise that value so it is not worthless to me. So it was, found the High Court, with Chiu and Ding in particular they could have surrendered the tenancy for payment, so that the tenancy must have had a value of £65,000 – a figure that Mr Delaney or another property developer would have paid for it.

The appeal was allowed.

Two points that don’t seem to have been raised spring to mind. First the fact that there was no provision for rent review seems to have been relied on by the district judge. We aren’t told what the lease did say, but if it was merely silent on rent review, then s.13 of the Housing Act 1988 gives the landlord and mechanism for keeping the rent in step with the market.

Second, surely Messrs Chiu and Ding now have a property which they can turn back into a freehold at a later date by exercising a right of enfranchisement under the Leasehold Reform Act 1967, now that the low rent test has been abolished? Or is there some arcane twist in the 1967 Act I have missed (the power to terminate on death perhaps)?

Despite those queries, it does seem a commonsense result. It is also a reminder that just because something is a long lease doesn’t mean it can’t also be an assured shorthold tenancy. Alarming but true.


  1. Niki Goss

    The s13 procedure to increase rent only applies to periodic tenencies and not to a fixed term

  2. Francis Davey

    Niki – of course it does. I am being unusually dense. So it won’t be available for the first 21 years – and lets hope the underlying regime has changed by then.


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