When Buying Property ‘Off Plan’ Goes Wrong

For a contract entered into in 2007, the fall in the value of the property may be as great as 20 percent. Lending institutions have tightened their criteria and the loan to value ratio will have ceased to make the property an attractive lending proposition. In the absence of available finance, buyers are increasingly unable to complete their purchases and are defaulting on their contractual obligations.

The Property Litigation Unit at Silverman Sherliker LLP has received a number of instructions recently from both buyers and developers in respect of “off plan” contracts that have gone wrong.

The consequences are well known, and both buyers and developers are alive to the possibility of deposits being forfeited. In the absence of a negotiated settlement, there is probably little that the buyer can do to prevent the developer taking the deposit in most cases. But there is some hope.

Developers do like to have as large a deposit as possible to use towards financing the development, but there comes a point where the deposit may be regarded as a penalty and not a genuine deposit at all.

In Workers Trust & Merchant Bank Ltd –v- Dojap Investments Ltd (1973) the Privy Council adjudicated that where a contract for the sale of land required a deposit of greater than 10 percent of the purchase price, it might be regarded as a penalty. It was said that by tradition in property transaction, a 10 percent deposit was regarded as genuine “earnest money”, but a greater deposit could be considered a penalty, thereby permitting the buyer to seek relief from the forfeiture of the deposit.

The Privy Council added that where a contract for the sale of land required a deposit of more than 10 percent of the purchase price, the onus fell on to the seller to show that the contractual deposit represented a genuine pre-estimate of their likely losses if the buyer failed to complete on the contract.

The relevant time is the date that the contract was entered into. It would not be sufficient for a developer to say that property prices had fallen, by say 20 percent, in the intervening period between exchange of contracts and the completion date. What has to be shown is that such an event might have reasonably been anticipated at the date of the contract. In what was previously a rising market, the prospect of a dramatic fall in property prices was probably not anticipated.

There is hope, therefore, for the buyer who bought a property off plan several years ago and who is now unable to raise the funds to complete. The deposit may not be wholly lost to him.

Other foreign judicial, but persuasive, authorities suggest that a reduced deposit clause in a contract for the sale of land (requiring the buyer to make up the deposit to 10 percent in the event of default) may be a penalty and was unenforceable (Loung Dinh Luu –v- Sovereign Developments Pty Ltd), but that a contractual provision for a 10 percent deposit paid by instalments may not be a penalty (Ashdown –v- Kirk and Iannello & Another –v- Sharpe).

From a developer’s point of view, there is danger in providing for a deposit greater than 10 percent of the contract price, and for accepting a deposit of less than 10 percent, but with a reduced deposit clause requiring the buyer to pay the difference in the event of a default.

So, in some instances, if a buyer is unable to complete on a contract, there may be some hope. If the deposit is deemed to be a penalty, it is unenforceable.

For more information, please contact John Abbott at Silverman Sherliker LLP.