New-build dreams turn sour: Property buyers who fail to complete off-plan deals are facing legal action from developers

Published 06th Mar 2010

Thousands of investors who agreed to buy off-plan hotel rooms or apartments are facing legal action from property developers because they cannot complete the deal.

A lack of mortgages means that many people are unable to finance the properties that they agreed to buy in 2007, at the height of the boom. Most have already lost deposits worth thousands of pounds and now face being sued by developers for the outstanding balance and damages once the apartments are resold.

Buying off-plan (before a property is built) was common before the credit crunch, as home buyers and investors sought to snap up bargains. But since 2007 the value of some new-build properties has fallen by 40 per cent, and mortgages have become much harder to secure.

Despite the market recovery — according to the Land Registry, house prices are now 5.2 per cent higher than in January last year — most lenders are still unwilling to mortgage new builds.

David Percy, 44, agreed to buy a hotel room in the Westminster Bridge Park Plaza for £275,000 in 2006. He paid a 25 per cent deposit of £68,750 but now needs to raise the balance of £197,250 (less the interest earned on his deposit). “I have tried all the high street lenders and numerous financial advisers and the answer is the same: they are not lending on commercial projects,” says Mr Percy, who decided to invest after attending a sales seminar held by Galliard, the property developer.

Mr Percy is unable to remortgage his home, and is considering converting his final-salary pension, worth £90,000, into a self-invested personal pension (Sipp) with which he could buy the property. However, he would still need to find £106,000 to complete the deal.

Dennis Hall, of Yellowtail Financial Planning, says that Mr Percy should cut his losses and run. “Opting out of a final-salary pension would be throwing good money after bad. He could end up with the loss of his pension and the property.”

Although many in the same position have walked away from their investments, the threat of legal action is looming. In London there are about 300 claims against defaulters by builders.

Prestige Homes South West, a property developer, won a High Court case in January after an investor backed out of an agreement to purchase off-plan flats. The court in Bristol ordered the investor to pay £133,282 in damages, costs and interest.

Ted Dancey, a property lawyer at Davitt Jones Bould, says it is unlikely that Mr Percy will be able to reclaim his deposit if he reneges on the contract, even if the developer finds another buyer. “In theory, the developer could seek an order compelling the buyer to complete the transaction, but this would be unlikely where the buyer simply does not have the means.

“Any prudent buyer should not part with a deposit or enter into a contract without being satisfied that they have either the cash or a mortgage offer in place to proceed to completion,” he says.

In May 2007 Steven Dowd, 31, and Helen Glanfield, 44, paid a £79,000 deposit on two off-plan flats at Caspian Wharf in East London, a complex to be built by Berkeley Homes, one of the UK’s largest developers. One flat was to be the couple’s home; the other was for Ms Glanfield’s daughter. The development was completed in summer 2009, but its value has fallen by 34 per cent since the couple agreed to buy. They cannot get a mortgage to pay the remaining balance and have had to default.

Although Mr Dowd accepts that he has lost his deposit, Berkeley Homes is suing him to recover the difference between the price he agreed to pay and the price the builder eventually received from the final buyer, plus damages. Other buyers who have been sued have issued counter claims, saying that they were mis-sold the properties.

“We were told by Berkeley at point of sale not to worry about securing a mortgage,” says Mr Dowd. “We were not aware of the impending financial meltdown.

“The pressure applied by Berkeley has been immense. They are threatening the livelihoods and future of ordinary people, many of whom will be made bankrupt by this.” Mr Dowd has now set up the Berkeley Homes Collective, a support group for homebuyers in the same position.

A spokesman for Berkeley Homes says: “We are committed to working on a one-to-one basis with all customers to find a solution that enables the customer to fulfil their contractual obligations. Berkeley Homes strongly refutes allegations of mis-selling. All customers were provided with clear information about the apartments at the point of sale.”

Stuart Law, of Assetz, the property investment adviser, says that people who are unable to raise finance should always try to work with developers to find a solution to the problem. “If you ignore the developer, they are more likely to take legal action,” he says. “Meanwhile, get out all the paperwork from the original sale and see if the developer made any false promises. Were you told mortgage funding would be available? If so, your contract may be invalid and you may be able to claim back your deposit — but you will need legal advice.”

This week Galliard has been advertising a “luxury stock liquidation” of new-build flats in Ilford, Essex, with two-bedroom apartments reduced from £320,000 to £149,000. “This just shows how overpriced the properties were in the first place,” says Kate Faulkner, of Designs on Property, the advice website. “Buyers need to do their own research, and not be swayed by promises of a ‘bargain’.

“Many who bought off-plan before the credit crunch fell victim to a slick sales pitch from developers without consulting their own independent advisers. For many it has been a very expensive mistake.”

Source: ' Times '

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