Court looked at Sales Speak and Reality when deciding on prohibited Property Collective Investment Scheme

Section 235 of the Financial Services and Markets Act 2000 (“FSMA”) controls sales of land, or arrangements relating to sales of land, which are “collective investment schemes” within the meaning of that section.

In Asset Land Investment Plc & Anor v The Financial Conduct Authority (FCA) [2014] the respondent was the Financial Conduct Authority (“the FCA”). By its claim, it alleged that certain so-called “land banking” schemes established and operated by Asset Land were unauthorised “collective investment schemes” within the meaning of Section 235 of FSMA and that certain of the defendants had been knowingly involved in such schemes in contravention of various provisions of FSMA.

A principal issue was whether there were “arrangements” within Section 235.

The court of appeal found that Sections 235(1), (2) and (3) are drafted in such a way as to justify the giving of a very wide meaning to term “arrangements”. It included understandings and agreements that were not legally binding.

Here “arrangements” came into existence through (i) the representations and statements made by brokers acting for Asset Land as to what the schemes entailed, coupled with (ii) understandings as to what the schemes entailed reasonably formed by investors (again based on what they had been told).

The test was to be approached objectively and was whether, based on what they had been told, reasonable investors participating in the scheme would have understood that the scheme involved arrangements of the type described under Section 235.

The Appellants’ argument that what investors were told was mere sales talk from which they made unjustified assumptions and formed aspirations, cut little ice.

“Arrangements” under Section 235 may subsist even in the case of inconsistent contractual terms.

In each case the judge must objectively decide what, in reality, were the “arrangements” between the operator of the scheme and the investors, and how the scheme was designed to, and did, operate in practice.

The mere fact that a contract had been concluded between the parties could not necessarily mean the “arrangements” were restricted to the terms of the contract.

As the Appellants accepted, the term “arrangements” extends to matters which are not contractually binding and are otherwise of no legal effect.

The differences in understanding of the Scheme as between the different investors were irrelevant because “each [investor] entered into [individual] arrangements with Asset Land that were covered by Section 235(1).

Also the mere fact that one or two individual participants had different intentions as to the future use of their individual land plots did not prevent the purpose of the scheme, as described by Asset Land’s representatives, from satisfying the purpose/effect requirements of Section 235(1).

What was needed was an objective assessment of the purpose of the arrangements. Here the arrangements which had been presented to all investors by Asset Land’s brokers were the acquisition of land for investment purposes. The fact that a limited number of investors may have signed up to the plan for reasons other than investment did not prevent “arrangements” within Section 235(1) from arising.

In ascertaining and determining the relevant “arrangements”, for Section 235, the court was not obliged to rely solely upon a strict view of the legal rights and duties of the parties as presented in the legal documentation.

The court had to look at the overall realities of the scheme, as it was designed to operate in practice, and, as it had been presented to investors.

The judge was perfectly entitled to find that, in truth, the essential features of the “arrangements” were those that had been represented in the oral, often telephone, sales pitch to investors, and not the artificial and misleading picture, attempting to negate “arrangements”, that Asset Land tried to present in the footers to some of its brochures and its contractual documentation.

That was particularly so as (i) it was only after an investor had paid the purchase price for his plot in full that he received a written contract containing those clauses; and (ii) any investor who did query the effect of those clauses, or otherwise raised the written contract’s terms with Asset Land representatives, was told not to worry about the provisions, they were merely legal requirements, or that the correct position had been as represented during earlier telephone calls.

So Asset Land’s appeal was rejected and the arrangements had been prohibited collective investment schemes.

The decision of the lower courts has now been unanimously upheld by the Supreme Court, the majority of whom said the practical consequences of the arrangements went wider than the express terms of the three core representations. The arrangements embodied in the core representations could not work if the investors exercised the rights that they theoretically possessed over their own plots:

“The dominion of the investors over their plots, although apparently complete, was in reality an illusion.”

This blog is posted as a matter of general interest. It does not remove the need to get bespoke legal advice in individual cases.