Legal risk to property investors
Investors hit by the downturn who choose not to complete property deals can still be forced to buy after court orders, lawyers have warned.
Many buyers who agreed to purchase city apartments being built in the boom now find values have plunged or have difficulty in finding a mortgage deal.
Some wrongly believe they risk only their deposit by pulling out after exchanging contracts.
But lawyers said the legal obligation to complete the transaction was clear.
Average flat prices fell by 19.5% in England and Wales from peak to trough.
The average price had risen to £175,776 by January 2008, according to the Land Registry, but then plunged by £34,211 to £141,565 by May 2009.
Quick profit
Many buy-to-let investors - including so-called amateur landlords - jumped on the property bandwagon as prices continued to rise.
Some who exchanged contracts, often agreeing after seeing plans of construction work, have since been hit by the squeeze on mortgage finance, or simply realise that a fast profit is no longer available.
This, in turn, has affected developers and they have put pressure on buyers not to pull out of contracts.
A developer can apply to a court to seek an order of "specific performance" - an injunction that makes the buyer perform his or her part of the contract and complete the purchase agreement.
"Such actions were rare in the boom times when finance was readily available and the value of property was ever-increasing," said Paul Lewis, a partner in commercial litigation at Gordons law firm in Leeds.
"But with the economic downturn, builders and developers are now seeking legal advice on ways to enforce the contract or at least seek advice on how to recover their losses."
However, he pointed out that judges would only make such an order if an award of damages was not adequate. Generally, they would be cautious when asked to force somebody to buy. Other options for the seller included:
- Rescind the contract - this is when the seller cancels the contract, keeps the deposit and retains the property in an attempt to resell it
- Rescind the contact and sue - the seller goes to court to claim any unpaid deposit and then tries to resell
- Sue for damages - if successful, the buyer who pulls out must pay the seller the difference between the contract price and the value at the date when completion should have taken place.
Suing for damages is often the better option if the buyer does not have the funds to buy the property. City-centre apartment investors might have equity in other properties and so an award could be enforced.
However, many investors remain ignorant of the rules, lawyers warned.
"There is a worryingly widespread and entrenched belief among buy-to-let investors that if they decide to withdraw from a purchase for which they have exchanged contracts, that only their deposit is at risk," said Jeremy Raj, of City law firm Wedlake Bell.
"The legal position is quite clear. They are legally obliged to complete on the transaction."
Administrators are currently considering legal action after the collapse of a development company which renovated a block of 112 apartments called Thames Tower in Leicester city centre.
Brampton Asset Management (Leicester) Ltd called in the administrators after contracts were exchanged on 111 apartments, but only 14 completed.
"If the completion dates were six months earlier, all those people would have paid. Mortgage products were still in hand then. The bank and creditors would have been paid and it would have been a completely different story," said administrator Chris Stirland, of Vantis Business Recovery Services.
Defence?
Generally, buyers have a defence against these actions by developers if the development was "not substantially completed", if the property was not adequately described or misrepresented, or if the value of the property overtakes the contract sale price or is sold for a higher value (in which case the buyer might be able to reclaim their forfeited deposit).
When a developer becomes insolvent some buyers also find that their deposits have been swallowed up by the developer instead of kept by their solicitors in a separate account.
A reputable builder will usually offer insurance to a buyer of a newly built property to cover defects and some of these policies provide for repayment of deposits in cases such as this.
Source: BBC NEWS
