With property prices still increasing, buying “off plan” can seem like a sensible choice to many people. Demand is high for sought after developments, such as Battersea Power Station, which sees interested buyers queuing round the block to be in with a chance of securing their piece of the newest properties in London. Not only does being first in the door give buyers a reasonable chance of securing the property they want, but in a property market where prices are increasing, they are also tempted in by the hope that the property will be worth more than the price paid as soon as they complete. Developers will also offer the opportunity to put your own stamp on the property by allowing you a choice in the finishes. These advantages, however, do not come without unique risks, some of which are discussed below.
The transactional documents provided by the developer’s solicitor tend to be extremely landlord biased. Developers think it is appropriate to start on a very one sided basis and allow no or minimal amendments, to keep all documents across the development uniform. However, it is still important to have these reviewed to ensure the heads of terms are reflected, confirm details of any unexpected costs or timelines and check that nothing unusual is contained within the lease or transfer (or indeed missing!).
Often at the point of exchange, little or none of the construction work has begun on the development so the developer will not want to be tied to constructing to an exact set of plans. There are therefore a lot of unknowns and the developer may deal with this by reserving very one sided rights to themselves. These rights may permit alterations to the floor area and floor plan of the property as well as to the materials used, the specification they work to and the terms of the lease, all without the buyer’s consent (amongst other things). These conditions can also allow the developer to alter the final purchase price if the floor area increases or decreases by more than a certain percentage. Clearly therefore it is important to identify these and reduce the risk as far as possible.
Developments can be marketed and sold years before completion is anticipated (which in itself is contingent on a number of things). It is therefore important to understand what money will be tied up in the development for that period, how these sums are held and also the potential future liabilities (both throughout the term of the agreement and at completion).
Firstly, at the point of agreement of terms, the developer will often demand a reservation payment in order to take the property off the market and not to liaise with anyone else during an exclusivity period. A deposit of 10% of the purchase price is then required at the point of exchange, and it is therefore important to understand whether this amount includes the reservation payment previous paid. It is also not uncommon to see additional advance payments required by the developer post exchange but prior to completion that the buyer was not made aware of. It is therefore important that these are identified and dealt with correctly in the contract.
As with any property transaction, the deposit (and other sums) can be held by the developer’s solicitor either as agent or stakeholder. In order to fund parts of the construction or development, the developer may state in the agreement that the deposit is to be held as agent, which means the developer may use the deposit before completion takes place.
If the developer defaults, goes bust or fails to complete, you may have difficulty recovering the deposit, so proper safeguards must be put in place to protect your position. It is also worth bearing in mind that given the potential lapse of time between exchange and completion, the SDLT levels may change and you could therefore end up paying more or less depending on the applicable provisions at the time of completion.
Finally, developers of off plan developments often set very tight deadlines by which to exchange so we would advise you to instruct a solicitor as early as possible in the process!