The UK property market may face a wave of legal disputes if purchasers of off-plan residential properties fail to complete on transactions as those properties are completed, according to private wealth law firm Boodle Hatfield.
Litigation may also flare up as prospective tenants of retail and other commercial properties currently being developed attempt to back out of contracts that commit them to lease space in those developments as they complete.
The impact of the COVID-19 lockdown on residential property values may push the market values of some new-build developments substantially below the value paid by purchasers.
If investors decide they will not complete, they may lose the deposits they have paid.
However, if the property values fall further than the cushion provided by the deposits, the developers might still pursue litigation against the purchasers who, under most contracts, would still be liable for further losses.
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.”
This mirrors a relatively widespread problem that emerged following the collapse of UK residential property values following the 2008/9 financial crisis.
In some new build developments, scores of investors had to be pursued to ensure they completed transactions they were legally committed to.
Young added that the current economic environment might not have the same impact on the property market as the last recession, but that developers should be prepared.
He said: “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.”
Kellie Jones, senior associate at Boodle Hatfield, added: “Where things will get very difficult is in those developments where a [high net worth individual (HNW)] has committed to buy many of the units.
“If that HNW is based overseas, there is the extra expense of enforcing the judgment of a UK court in another jurisdiction.”
“However, if a development has not been finished on time then a purchaser may take steps to serve a notice to complete so that it can rescind and reclaim the deposit if the seller is unable to comply.”This comment follows the news that Orion Real Estate Fund V does not intend to complete the purchase of a £400m portfolio of retail parks from property development and investment company Hammerson.