Controversy builds over developers' demands for staged payments from house purchasers

"A system operated by greedy builders fuelled by greedy lenders" is how William Fagan, the former director of Consumer Affairs, once described the practice of demanding staged payments from house purchasers.

Staged or interim payments, which involve buyers paying for new homes in instalments as the construction work progresses, has not found favour in other quarters either and has now ended up the subject of a court case in Cork.

Mr John Leahy of Mallow and the EBS Building Society are being sued by builders Kenny Homes of Limerick for interest on late payment of staged payments under a building agreement. Justice Con O'Leary has reserved judgment in the case at Cork District Court until today.

Whatever the outcome of the case, a strong body of opinion remains dissatisfied with the practice, which sees buyers effectively funding builders costs as they go along. To do so, purchasers - including hard-pressed first-time buyers - have to draw down their mortgages early or even avail of bridging loans. In most instances, purchasers end up paying rent or the mortgage on their old property while funding the new mortgage as well.

Although the practice is normal in commercial contracts and for one-off houses, it has not been common for new residential developments in Dublin and the surrounding counties for many years. Instead, purchasers pay a deposit of 10 to 15 per cent with the balance payable upon completion. But staged payments remain popular in Munster, particularly in Cork and Limerick, and in parts of the west including Galway and Sligo.

Mr Peter Kelly, who is standing for the Progressive Democrats in Cork in the June local elections, says it is not uncommon to find house purchasers paying a booking deposit of £3,000-£4,000 (€3,809-€5,079) for a three-bedroom semi-detached house worth £120,000 in a good neighbourhood in Cork. Upon signing the contract, a further £15,000 to £18,000 could be paid over to purchase the site along with a similar sum for the builder. When the house has been built to first-floor level, a further £10,000 to £15,000 may be paid with the same sum due on reaching second floor level. "By the time the roof is on, up to 75 per cent of the purchase price may have been paid," he says.

In addition to the interest costs being borne by the purchaser, they are left financially exposed to delays in completing the house and are left with less leverage over the builder if the finished work is not up to scratch.

But of most concern is the situation the purchaser can find himself in if the builder goes bust. Under the first phase of the HomeBond Stage Payment Bond, payments of up to £20,000 or 15 per cent of the purchase price, whichever is the lesser, are protected. When construction reaches the roof stage, the amount covered is increased to £50,000 or 50 per cent of the purchase price, depending on which is less.

But those involved in the industry report frequent cases of purchasers paying staged payments well in excess of the value of site and the work done. In some cases, up to 80 per cent of the price is paid before the roof even goes on.

If the building firm then collapses, buyers find themselves out of pocket and faced with the prospect of hiring another builder to finish the construction with depleted resources. Meanwhile, if the title has not been transferred, purchasers could end up having difficulty with the liquidators in securing it.

"The agreement is all weighted in favour of the builder with the purchaser funding the builders' capital as they go along. It leaves the purchaser completely exposed. There is no upside in it for borrowers," one industry source says.

However, the practice is defended by the Irish Home Builders' Association which believes there is a lot of misinformation surrounding it.

It argues that the system leads to lower house prices and more certainty for purchasers as builders finalise the house price and sign contracts at a much earlier stage. "The presence of staged payments has, in our opinion, resulted in the prices of houses being more reasonable than they might otherwise be," says its director, Mr Michael Goggins. He cites Cork, where the practice seems to be most prevalent, as an example of this. The city has enjoyed more moderate increases in house prices in recent years than has been the case nationally.

But the Law Society remains opposed to the practice. "We believe that staged payments to builders is a system that is unfair to purchasers and should be discontinued," says director-general Mr Ken Murphy. There is also some concern in banking circles about the practice although many blame the lending institutions for facilitating such payments. However, the Irish Bankers' Federation points out that the banks provide the funding to facilitate customers. At the end of the day, the IBF believes the problem is one for the building industry in the first place although it would like to see appropriate measures put in place to discourage the practice of staged payments where the title is not transferred.

There have been steps to tighten up the rules governing staged payments. The current Director of Consumer Affairs, Ms Carmel Foley, says she is monitoring the situation but her office has welcomed the guidelines on interim payments included in the IHBA's voluntary code of practice, which came into effect last February.

It lays down certain rules, including the provision that the value of interim payments should not exceed the value of the site and work completed at the date of payment. All payments must be covered by the HomeBond Agreement except where the title is transferred before completion.

The code, which is mandatory for the 80 per cent of builders covered by the IHBA, was described as "a step forward" by Ms Foley. "Our problem is not staged payments but that they are excessive, over and above the protection available under the HomeBond scheme," she said.