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The credit crunch causes an increase in property litigations

publication date: Feb 25, 2008
author/source: Sian Evans
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The credit crunch and the slowing down of property prices - in particular flats - is now starting to cause potential problems for both developers and investors. 

It is very common for investors to have exchanged contracts on properties some time ago which are now only just completing. The valuation of those properties in 2005/2006 may be very different now to the valuations obtained at the time of exchange and in the current property market those valuations may have gone down rather than up. 

Where does this leave investors and also developers? 

An agreed completion date is generally not of the essence in a contract which means it is little more than a target date. If an investor misses the completion date or indeed, if the developer is not ready, then the other party may start the clock ticking by serving a notice to complete. This notice generally will provide a strict deadline for the buyer to complete the purchase within 10 days. 

An investor may be reluctant to complete due to problems in obtaining finance on a property which has now been valued at less than the purchase price. An investor can choose to continue with the sale or pull out. The consequences for the investor could be fairly costly either way. If the investor does complete they could have bought an asset which is worth far less than they bought it for. If the investor doesn’t want to complete, the developer is entitled to retain the investor’s deposit. That investor would also have to pay any balance of deposit that was due if they had paid less than 10% on exchange. A developer would also be entitled to claim compensation if in fact the property was then sold at a lower sale price and for any other legal and other costs of remarketing. 

The developer may however have to look at this pragmatically and decide whether in fact they still want the sale to go through at a lower price as any sale may be better than recovery of a deposit if the market is stagnant. 

An investor may try and get more time to complete by arguing that the notice to complete was not valid on the basis of the quality of the build and/or the property is not ready for completion. This is a high risk strategy and is only a route to consider if there are valid issues of concern regarding the build. This would also be a long and costly route for the investor with no guarantee that this could be successfully argued if the matter went through to court. If the case is lost then the investor could be left with a huge legal bill for their own solicitor and also the developer’s legal costs. 

The investor could also take advice as to whether in fact there may be a claim against a surveyor who provided a report on the basis of over valuation of the property at the time of exchange. These cases are often fraught with difficulty and the majority of surveyors in the market in recent years have been more cautious on valuation. 

There is anecdotal evidence indicating that in most of the major cities that have seen a boom in apartment developments, surveyors have been cautious when carrying out valuations and investors have negotiated lower prices before exchange on the basis of those valuations. The duty of care a surveyor may owe to an investor could also be limited if the valuation was on the instruction of the a third party e.g. the funder. A surveyor is under a duty to exercise the ordinary skill of a reasonably competent surveyor. A permissible margin of error is generally said to be 10% if what is said to be the right figure which can be extended up to 15% in exceptional circumstances. All this means that getting any sort of claim up and running against a surveyor will be very difficult. 

All these factors mean that property litigation is on the increase and both developers and investors alike may have to take a more pragmatic view in trying to negotiate a compromise suitable for both parties. 

Sian Evans, 
Partner in Weightmans LLP specialising in property litigation.