“I paid a 10% deposit on a new build property 2 years ago but I cannot now afford to purchase the property due to the Covid-19 pandemic. Can I pull out of the contract and will I get my deposit back?”
With a new build property and a purchase off-plan, developers will require a buyer to commit early during the course of construction, to agree a contract up front and provide a deposit on signing the document. This is to prevent buyers from looking to pull out of a contract if they later change their mind.
The fact that your finances have been hit by the current pandemic is not enough to frustrate the contract (unless there is a very specific clause which foresees the pandemic as a frustrating event). Your contract with a developer is still a contract, and you'll find it hard to back out without being in breach and being hit financially.
If you choose to back out now, you are very likely to lose your 10% deposit. In addition, there may be other financial consequences for you to consider:
Assuming the property is ready and you have been notified of a completion date by the developer, if you do not complete the purchase on that completion date, you may be served with a formal notice to complete by the developer.
A notice to complete makes time of the essence and it typically gives you 10 working days to complete the purchase. If completion does not take place on or before the deadline, the buyer will be in breach and the developer may choose to rescind (essentially undo) the contract: in which case, the developer can at the very least keep the deposit paid plus any interest accrued.
But, there is an additional risk in a falling property market. If the developer suffers a loss on the re-sale of the property, it can claim compensation from you by way of damages for that loss, plus any costs incurred. This is a particular risk if property values fall more than the 10 % covered by the deposit.
The alternative is that the developer chooses not to rescind the contract and tries to force you to purchase the property in any event. The developer may bring a claim against you for specific performance of the contract, to try to force you to complete the purchase. This is only likely if the developer knows that you have funds available to purchase the property.
An alternative scenario is that the property was meant to be finished but due to lockdown, its construction has been delayed beyond the anticipated date for completion. Will that let you back out of the contract and keep the deposit?
You will need to check the wording of the contract: does it permit development overruns? Contracts for new builds typically allow for delays so it is unlikely you would be able to rescind the contract due to the delay.
What is the longstop date for completion? If the longstop date has passed and the developer is not ready, willing and able to complete, you can serve your own notice to complete to give the developer 10 working days to complete the transaction. If they fail to do so, you are then in a position to rescind the contract and claim back your deposit with accrued interest.
If you have any property or construction related issues or disputes, then Prettys’ real estate team has the expertise to assist you at this time. We can also offer fixed fee initial reviews of any property-related disputes, to give you an idea of options and next steps. Please email CommProp@prettys.co.uk or call us on 01473 232121