WHY IS A 2015 LEGAL CASE HAVING ISSUES FOR RESIDENTIAL DEVELOPERS? Fri 07 Jul 2017

WHY IS A 2015 LEGAL CASE HAVING ISSUES FOR RESIDENTIAL DEVELOPERS?

A barely-reported Supreme Court case from  September 2015  could only now be having serious financial consequences for residential developers.
 
Cavendish v Makdessi did not directly relate to property but the judge’s ruling is likely to have implications for the new build residential sector particularly as transaction numbers and prices are softening at present.  Deposits paid of more than 10% of the purchase price on brand new homes may have to be returned to defaulting buyers if regarded as “excessive”  or a ”penalty” 
And it could get worse.  Developers may have to repay, not just the part of the deposit in excess of 10%, but the WHOLE amount even if  the purchaser fails to offer an explanation for withdrawal!

A deposit of around 25% of the purchase price on brand new houses and flats, especially in London, is not uncommon and can work to the advantage of both parties. Developers who may be nervous about market prospects and/or exchange rate fluctuations might seek a larger commitment from buyers to increase certainty and help finance future building work.
On the other hand, a higher deposit can allow purchasers to secure their  property on better terms,   carry out changes to the specification or design and even make a profit by selling on their contract.
Developers seeking  to resist claims for repayment may  argue the opportunity to make a gain and obtain a better purchase  price  justifies acceptance of a higher deposit.

The ruling could of course prove  a great relief for buyers who change their minds about a property if, for instance,  they find values are dropping after paying their deposit.
Further legal clarification is  awaited to determine what might constitute the ‘special circumstances’ in which larger deposits can be paid and the level  considered ‘excessive’.
Returning deposits may be especially difficult for the developer if the extra sums are invested in further phases of the scheme,  as part of a Special Purpose Vehicle or other funding.

As a result, solicitors could be asked to hold deposits in separate accounts just in case their clients are subject to subsequent re-claim action.

The message is clear – developers and their purchasers should  seek urgent independent professional legal advice if they think they may be a potential winner or loser!

Jeremy Leaf, A Former RICS Residential Chairman & Independent North London Estate Agent – Summer 2017

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