Thousands of property investors, including buy-to-let landlords adding to their portfolios, face potential legal disputes if they avoid completion of transactions, warns a leading private wealth law firm.
Off-plan buyers will lose their deposits if they fail to complete but that would not be the end of their obligations, according to Boodle Hatfield.
Many investors are concerned that the impact of the lockdown on residential property values may push the market values of some new build developments substantially below the value at which purchasers paid, leaving some scrambling to get out of off-plan deals.
However, if the property values fall further than the cushion provided by the deposits the developers of those properties might still pursue the purchasers who, under most contracts, would still be liable for further losses.
This problem was relatively widespread following the collapse of UK residential property values after the credit crunch in 2008-2009. In some new build developments scores of investors had to be pursued to ensure they completed transactions they were legally committed to.
Colin Young, property disputes partner, at Boodle Hatfield, said: “The contracts of most residential new-build developments are fairly clear cut and deposits would be at risk. Many purchasers also forget that this might not be the end of it. You may be liable for any additional loss the developer makes from selling that property, on the market, for less than you originally agreed.”
“Hopefully property prices don’t fall too far but there are certainly developers are now exploring their options over deals where the buyers seem to have gone cold. Once the lockdown is over we expect that buyers who should have already completed will start being asked to agree to a new timetable.”
“What we are also hoping is that these problems can reach a negotiated settlement.”
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We bought two new built properties in Aylesbury, one 3-bedroom detached and the other 2-bedroom semi. Two buy-to-let interest only mortgages have been agreed by the lender and the LTV is 60%. Two weeks after we submitted the internal decor choice form, the lock down started, so the builder had to suspend the building work.
We haven't exchanged contract yet, so might be a bit luckier than the cases described in the above article. The housing market statistics shows all properties, both new and second-hand, had prices down between 10% and 15% after 2008 financial crisis, so I wonder this Covid-19 crisis may cause even a bigger price drop? Our solicitor is chasing for our decision as to the purchase. I'd be grateful if you could share your views about this. Maybe I should just cancel these two purchases. At least losing a few thousand (lender valuation fees plus solicitors' fees, etc) is better than losing £30K in a year? Thank you.
Hi bella, always worth consdiering renegotiating with the developer first, as they arent going to get the price you are paying from any other buyer this year, and at a more sensible level, it will still make the same sound investment decision it was went you first made the offer. As with the stock market though, I see these changes in values as temporary corrections to the lockdown that will quickly reverse themselves when we have a vaccine in circulation and life returns to normal.
I would definitely pull out and cut your losses. If things get clearer over the summer there will probably be opportunities to get back on an even keel then but the downside of not pulling out is probably more than the cash you'll lose in pulling out, given you haven't yet exchanged contracts.
Thank you so much for your views. Yes, I think I should be more cautious.
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