We paid a 10% deposit to buy a new-build flat but now we’re worried about house prices and our finances, will we lose the money if we pull out?
This is Money question: "I bought an off-plan flat in Battersea two years ago but so far have only paid a deposit. As property prices are expected to fall as a result of the coronavirus I do not want to complete the transaction and buy the property. But if I back out now can I still get my 10 per cent deposit back?"
Sarah Davidson, of This is Money, replies: This is a situation that many people who have agreed to buy homes are facing at the moment.
A Royal Institution of Chartered Surveyors report said that 80 per cent of its member agents had seen buyers and sellers pull out of property deals during lockdown.
Yet while those buying ‘second hand’ homes are not financially committed to the purchase until they exchange contracts, people purchasing new-build properties will often have paid a deposit that they could forfeit.
In the current climate it’s no surprise that buyers are concerned and Rics member estate agents said they expected house prices and sales to fall in the months to come.
Some 40 per cent said they expected property values in the newly-reopened market down by at least 4 per cent.
At the same time, more than 8 million people have been put on furlough, with many more worried about the security of their future income.
It’s understandable that you’d be feeling reluctant to commit yourself to the purchase of a brand new flat with all this going on around you.
However, a contract with a developer is still a contract, and you’ll find it hard to back out without taking a financial hit.
In fact, it’s to prevent buyers from pulling out in circumstances such as these that developers require a deposit from you and a contract to be signed up front.
If you choose to back out now, there may also be additional financial consequences.
We asked a specialist solicitor to review your case to give you a clearer idea of your rights and responsibilities.
Kellie Jones, Partner at law firm Boodle Hatfield, says: Unfortunately, if you back out of the sale now, you are very likely to lose your 10 per cent deposit.
Assuming the flat is ready and the developer has notified you of a completion date, if you do not complete the purchase on the completion date, the developer can choose to serve you a formal notice to complete.
This makes time of the essence and gives you 10 working days to complete the purchase.
If completion does not take place within that time, then the developer may choose to rescind the contract. If it does so, it can also choose to keep the deposit paid plus any interest accrued.
There is a further risk in a falling property market.
If the developer suffers a loss on the re-sale of the property, it can claim damages for that loss, plus any costs incurred, from you. This is a risk if property values fall more than the 10 per cent covered by the deposit.
The developer may choose not to rescind the contract and try to force you to purchase in any event.
A claim can be made for specific performance of the contract, to try to force you to go ahead with the purchase but this is only likely to arise if the developer is certain that you have funds available to purchase the property.
Also the flat was meant to be finished by the end of last month but because of coronavirus it has been delayed – will that let you back out of the contract and keep the deposit?
It will depend on the wording of the contract. Has the longstop date for completion passed?
Or, does the contract allow for development overruns?
Contracts for off-plan purchases usually allow for delays and it is only when the longstop date has passed that you might have a remedy.
If the longstop date for completion has passed and you are ready, willing and able to complete the purchase, you could serve your own notice to complete, giving the developer 10 working days to complete the purchase.
If the developer does not do so, you may rescind the contract and claim back the deposit with accrued interest.
This article was published in This is Money on 1st June 2020.