When completing a contract means negative equity

PERSONAL FINANCE:A recent court case may give hope to the thousands of people who bought property off the plans and are now facing the prospect of completing the sale of a much devalued property

FOR THE THOUSANDS of would-be homeowners who put deposits down on new developments at the height of the boom, the dream of owning their own home has quickly turned to a nightmare. Cash-strapped builders are now trying to force many of these buyers to fulfil the terms of their contracts – despite the fact that property prices have fallen by as much as 50 per cent. But is there any way out for beleaguered purchasers? Well, a ruling in a recent court case shows that there just might be.

While there may be large tracts of vacant properties all over the country, not all of these are waiting for purchasers – many are in fact sale agreed but the owners are in dispute with the developers over the purchase price. Back in the good old days of the boom, for those who found themselves unable to go ahead with a purchase, typically by forfeiting their deposit to the developer, they were allowed to walk away from their contract. After all, the developer frequently sold the property on at a higher price.

Now however, for those who purchased properties off the plans some time ago in developments which are now approaching completion, going ahead with the deal could see them fall immediately into negative equity of several hundred thousand euro.

In south Dublin for example, prices for two-bedroom apartments at the height of the boom went as high as €500,000-plus, but two-beds in the area can now be bought for less than €300,000, thereby potentially plunging new owners in developments only now being completed into negative equity of as much as €200,000.

On the face of it, there isn’t much hope for people who signed a contract some years ago and are now are looking for a way out.

“Once you sign a contract, you have to fulfil its terms. It’s binding,” says Lorna McAuliffe, a partner with Reddy Charlton McKnight. “If you pull out of a contract, the developer is entitled to not only forfeit your deposit but also sue for breach of contract and loss arising from the breach.” However, there may be special conditions in the contract, such as when completion is dependent on you having the requisite financing in place, or that the developer has not complied in full with the original planning permission, which may give you an “out”.

“It is important that you very carefully assess the terms of the contract,” says McAuliffe, pointing out that there are “no absolutes”, and that every scenario is different. Otherwise, negotiating the price down might be your best defence.

However, cash-strapped developers might nonetheless bring you to court to force you to go ahead with the sale, by pursuing “specific performance”, whereby you, as the purchaser, are required to complete on the contract and purchase the property.

Already, there have been a number of court cases brought by developers looking for “specific performance” – and the developers have won. Earlier this year, for example, a company linked to developer Treasury Holdings took legal action against people who had contracts to purchase apartments in the Spencer Dock development in Dublin’s northside docklands, but wouldn’t go ahead with the deal.

ONE PURCHASER HADa judgment made against her for €505,000, having reneged on the purchase of an apartment in the Spencer Dock development on North Wall Quay. She had originally paid a deposit of €20,000 and signed a contract to buy the two-bedroom unit priced at €525,000, which is now thought to be worth less than €300,000.

However, in the above case it is likely that the developers did their due diligence on the purchaser to ensure that she had the means to purchase the apartments.

“There is no point in a developer pursuing the purchaser unless it makes economic sense,” notes McAuliffe, adding, “otherwise they could be just throwing money – that they don’t have – at the problem”.

So what if you simply can’t afford to complete – if the bank will no longer offer you a mortgage of the scale required and you have no other means with which to go ahead with the purchase? Well, a more recent court case may offer some shred of hope to those stuck in this situation.

On July 9th, in the Aranbel v Darcy case, the High Court ruled in favour of a purchaser on the grounds of “impecuniosity” ie, they couldn’t afford to go through with the transaction. The purchasers had agreed to buy property in Fortunes Lawn, Citywest, Co Dublin, signing contracts in 2006. By March 2008 however, when they were obliged to go ahead with the purchase, they were no longer in a position to do so.

In his judgment, Mr Justice Frank Clarke declared that if it can be demonstrated that “the purchaser concerned does not have the assets or borrowing capacity sufficient to allow them to purchase the property concerned at the contracted price, then a court should not make an order for specific performance for such an order would be in vain”. But remember, simply offering the developer proof that you cannot obtain a loan approval is not enough to get out of your contract.

“The party seeking to defend an action for specific performance under the defence of financial impossibility must show the court that he or she has insufficient assets which are capable of being realised and insufficient borrowing capacity,” says McAuliffe. “To rely on such a defence a defendant will have to submit a statement of assets and liabilities to the court to support any possible defence of financial impossibility.”

And, while the court ruled in favour of the purchaser in this instance, it did suggest that in similar cases it might require that the family home be sold in order to complete a contract for the purchase of an investment property. If this was to arise, the purchaser would have another fight on their hands.

“It may well be open to a defendant to argue that the sale of the family home would have practical consequences so significant that to require its sale would constitute hardship, but it remains for such an argument to be adjudicated on by the courts,” McAuliffe says.

So, while there may be a way out for you if your financial circumstances have changed significantly since you first put a deposit down on a property, it is unlikely that you will ever get your deposit back. With sizeable deposits in the order of €30,000 placed on an average two-bed property in Dublin, this will hit many potential homeowners hard, and may delay purchase of another property – at a lower price – in the near future. Moreover, as in the Aranbel case, damages may also be payable. However, it nonetheless beats walking into negative equity of potentially several hundred thousand euro.