Property investor

Developers are lining up to go to court to stop clients from reneging on contracts: is there any way out for buyers, writes JACK FAGAN

THE STAND-OFF between apartment developers and cash-strapped buyers looks like turning ugly. Several building firms are lining up for the High Court to stop purchasers from reneging on contracts signed at the height of the property boom.

Treasury Holdings was first into the fray and it will be quickly followed by other developers desperately anxious to wrap up this unfinished business. But while it may be relatively easy to prove breach of contract in many cases where buyers signed contracts and paid deposits, it will be another matter altogether of collecting the balance of the purchase price, simply because of the banking freeze and, even more importantly, the collapse in property values.

Though the banks like to give the impression that they are open for mortgage business, the reality is that they are very selective as to who gets one these days. Purchasers who no longer have the financial capacity to service a mortgage are being turned away all the time. As a general rule, the lenders are giving priority to first-time buyers who can meet a number of stringent conditions, such as a good savings record and security of employment. Even those who pass with flying colours cannot expect to get any more than 92 per cent of the property’s value.

It would be misleading to suggest that this clash between housebuilders and purchasers is all about bank liquidity. It is not. The real problem for purchasers is that the value of properties booked in 2007 and 2008 have dropped by 50 per cent and more. For most it means that as soon as they take possession of their new apartment it is already in negative equity by anything from €150,000 to €250,000 – a scary prospect even for those in safe employment. The fact that the value of the property has collapsed is unlikely to be seen as a mitigating factor by the courts.

Lorna McAuliffe, litigation partner with Dublin solicitors Reddy Charlton McKnight, says there appears to be a perception amongst the public that where a vendor forfeits the deposit paid on foot of a contract of sale, the purchaser will not be pursued any further. “This belief is misconceived as can be seen from cases reported in the media over the past month. It is open to a developer to not only forfeit a deposit but also then to sue for breach of contract and loss arising from the breach. Alternatively, a developer may elect not to forfeit the deposit but to issue proceedings for specific performance and/or seek damages.”

Ms McAuliffe advises anyone unable to complete a contract of sale to “engage with the vendor” and to consider providing a detailed statement of their financial affairs where appropriate. “It may become clear to the vendor that the purchaser does not have the means or assets to complete the sale. If the vendor recognises that the purchaser is not a mark for damages or does not have the funds, the vendor may decide not to take any legal action as, in effect, it is a case of throwing good money after bad. However there is no guarantee in this regard.”

Ken MacDonald of new homes agency Hooke MacDonald has also encouraged purchasers who signed “binding unconditional contracts” and who for a variety of reasons are unable to complete the purchase to engage in meaningful discussions with the vendor in an effort to try to reach an amicable solution. “Our experience is that vendors are generally prepared to compromise and thus avoid the trauma and cost of litigation.” Ross Shorten of Lisney, says developers need to decide if it is worthwhile bringing a signed-up purchaser to court if that party has no funds to complete. In these cases it may be better if both sides agreed to set aside the contract in return for a compensation payment.

That is exactly the option facing one investor couple who booked a €450,000 apartment in 2007 but has watched it fall in value to €220,000. The couple had loan approval for the original price up to last summer but, with liquidity even tighter now, the bank is no longer interested in funding the purchase even at the revised value. Court proceedings are in the pipeline but, with the purchasers unable to budge, the developer has now given them the option of either renegotiating the selling price or buying their way out of the contract. That consideration is likely to be around €100,000. In these days, where would you borrow a ton?