Buy-to-let investors sued by developers

9 September 2009

Hundreds of buy-to-let investors have been sued by developers after they tried to back out of off-plan property purchase contracts in the mistaken belief they could merely forego their deposits.

Buying off-plan involves investors agreeing a price for a new build property before construction had finished, and assumes the value of the property will rise before completion.

New build flats, popular with buy-to-let investors, have been among the worst hit in the UK housing market crash, with values plummeting by as much as 40% in some areas. The collapse in UK property prices means many off-plan property buyers are trying to avoid completing if they feel they are no longer getting a good bargain.

Meanwhile, buy-to-let buyers have found it hard to get funding for their investments as UK banks clamp down on mortgage lending. Market research reveals that the number of investors looking for a new buy-to-let mortgage has increased by 50% in the past year, but the number of available mortgages has dropped by 70%.

Jeremy Raj, head of residential property at law firm Wedlake Bell, claims that hundreds of investors have already been pursued through the courts for trying to wriggle out of off-plan contracts.

But he says that a string of recent judgments have confirmed buy-to-let investors are contracted to purchase the property rather than just forego their deposit.

“There is a worryingly widespread and entrenched belief amongst buy-to-let investors that if they decided to withdraw from a purchase for which they have exchanged contracts that only their deposit is at risk,” Raj adds.

In fact, the legal position is quite clear. Raj explains: "Investors are legally obliged to complete on the transaction. Damages are not even restricted to the difference between today’s market price for that property and the price they contracted to purchase at.”

Developers that have begun launching legal actions against investors include Grosvenor, Ballymore and Berkeley Homes.

Kate Kilborn, a spokeswoman for Grosvenor, says it is currently taking legal proceedings against a small number of investors who have defaulted on the contractual agreement.

“These purchasers have a legal obligation to fulfil the terms of their contract and in taking this action Grosvenor is seeking to protect its commercial interest," she says. "This action is a last resort and up to this point we have been as flexible as we can be to allow completion.”

Buyers of off-plan properties from Berkeley Homes have now set up a support group and appointed a City law firm to advise them on the problem. The Berkeley Homes Collective has over 170 members and claims to account for over £18 million worth of sales for the developer.

Raj says investors who cannot complete on their deals because they have not put in place funding may ultimately face debt recovery measures.

“No commercial organisation wants to enter into litigation with its customers – it is an absolute last resort," he adds. "However, developers have a legal obligation to protect the financial interests of their shareholders."

Add new comment