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Legal risk for property investors hiding behind economic uncertainty

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Property investors, relying on the country’s economic woes as justification for reneging on contracts, should pay more attention to the legal pitfalls awaiting them and should be warned about the liability associated with investment contracts.

Many buyers agreed to purchase city apartments before the housing bubble was unceremoniously popped. Thinking they could lose only their deposits, they retracted their investment claws and scampered for the highways. But court injunctions could start reeling in Houdini investors, forcing major payments in the process.

Buy-to-let flooded the market early in this millennium, as shouts of profit and easy money rang around the country’s cash-rich circles. But values have plummeted, and those who agreed to purchase properties after seeing initial plans, jumped ship to avoid being left with a high-rise white elephant.

Now, spurned developers can apply for “Specific Performance” from the country’s courts. The injunction forces a buyer to stick around and complete their purchase agreement, meaning the continued abuse of baby-holding developers could be coming to an end.

However, judges are not handing out injunctions like business confetti; the process will only be approved if an award of damages is not adequate enough for a snubbed developer. Remember, judges will always be cautious when forcing someone to buy.

There are three main avenues for sellers looking to reclaim promised revenue:

• Rescind the contract – A seller cancels a contract, keeping the investor’s deposit and retaining the property with the chance of selling it as the market picks up.
• Rescind the contract and sue – A seller goes to court to obtain any unclaimed deposits, and then returns the property to market shop windows.
• Sue for damages – A buyer who pulls out must pay their seller the difference between the contract price and the property’s perceived value on the date building completion should have taken place.

City investors are generally not virgins to the market. They enter the property arena with large equity in the form of separate properties or investments. Taking an investor to court could prove fruitful and teach thrifty investors a lesson on pulling out, and further depreciating the UK’s property market.

But property developers cannot wade into these legal waters without first ensuring they have covered their own backs.

Buyers still have several defences against justice seeking developers. If a development was not “substantially completed” before they pulled out, if the property was not truthfully described or misrepresented, or if its value overtakes the contract sale price or is sold for a higher value, a buyer can pull the final threads out from under developer’s feet.

While it seems easy to condemn the ‘big-wigs’ who retreat at the first sign of development crisis, it should not be forgotten that there are innocent parties also sinking in the property landslide.

Those who were looking to capitalise on property’s seemingly never ending rise up the monetary ladder have been badly burnt by falling prices, but not all deserve to be dragged through city courts.

Developers looking to secure a return on their properties should target their enemies wisely, guarantee that a target has adequate funds to be recuperated in a noble quest for compensation, and try to limit their own legal costs in the process.

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Written by Andrew Hodges

December 1, 2009 at 10:37 pm

Posted in Comment, LinkedIn

Tagged with , ,

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