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The Risks of Buying Properties Off Plan!

Solicitors in London

The Risks of Buying Properties Off Plan!

News article published on: 21st May 2021

The Daily Mail reported recently that 300 families a week are having to move into shoddy newly built homes. Not all of them will have been purchased off plan but many of them will have been.

Buying off plan means committing to purchasing a property before it’s finished and whilst it is being built. Whilst there are many advantages of buying off plan such as it being cheaper and a developer taking into account your wishes in terms of colour schemes and such, there are also several risks:

Buying off plan is not for the faint hearted especially where you are having to wait a number of years for completion but you have exchanged contracts and pay over a substantial sum in terms of deposit. The biggest risk is of the developer going bust. The contract to purchase the property will include a term which requires the developer who is usually the seller to build the property and then complete the purchase by handing it over to the buyer.

If the developer becomes insolvent there is a possibility that the company’s liquidator tries to sell the contract on to another developer to enable the build to be finished and for the contractual obligations to be met. The process will inevitably cause a delay which might entitle a purchaser to revoke the contract and get back the deposit but where the deposit has been released to fund the development there is little chance that the deposit would be returned.

In circumstances where the development is to be sold, purchasers may acquire a lien over the net proceeds of sale if their contract was protected with the registration of a unilateral notice at the Land Registry. However, often developers will have registered charges which will have priority over the purchaser’s interests.

It is likely that a number of buyers are in the same situation and it might be worthwhile them all attempting to club forces as they may have a louder voice but if there is no money then this may be a futile exercise.

The developer  may well have contracted to provide a new homes warranty and it is worth investigating the terms of that policy and whether it offers protection and covers the deposit. However these warranties can often limit the deposit protection provided and purchasers paying large deposits may find that they are not fully protected.

It may be that the developer simply does not finish the project before the longstop date expires leaving them in breach of contract. However pursuing a developer for breach of contract is not a simple matter and is timely and expensive and there is certainly no guarantee of success with the added risk that during the course of proceedings the developer may become insolvent.

It may be simpler for a purchaser to check if it has any rights under the Consumer Code for Home Builders. It requires the developer seller to provide reliable and realistic information about when the construction of the property may be finished, the date of completion and the date of handover of the property.  If the developer is a participating developer under the code there is a low cost dispute resolution scheme available however the maximum value of the combined aware available under the Code is £15,000 inclusive of VAT and therefore the scheme is unsuitable for the vast majority of homebuyers given their deposit is likely to be more than this. The adjudicator may issue a performance award (that is, where the participating developer has to do something). I am not sure the adjudicator can order the developer to deliver the build where there are more serious issues.

With the government’s focus being on building homes and the increased availability of off plan purchases surely it is time for the issues of developers going insolvent or simply not completing projects being addressed so as not as to leave purchasers who have already invested in their proposed purchase without redress. It is in the government’s interests to encourage such developments and for the public to feel safe when investing in them.

If you would like to discuss a similar matter with the property litigation team, contact Shilpa Mathuradas on 0207 485 8811 or complete an online enquiry form.

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