Buyers in new developments across the Republic could be risking their deposits by purchasing property without a protective clause in place should their loan approvals fail.
In recent years contracts for new home buyers included a clause stating that the agreement was “subject to loan approval”. This protected the buyer from losing their deposit if the lender did not approve the loan when it came time to draw it down.
Despite a recommendation from the Law Society that buying without this protective clause in place would be "unsafe" for purchasers, an increasing number of new-build developers are nonetheless refusing to include the clause, which was once commonplace.
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According to Niall Geaney, a partner with Clontarf-based Geaney Solicitors, most contracts he now receives for a new build will not have the clause. While in 60-70 per cent of cases he can get the clause added in, in the remaining 30-40 per cent the developer has held firm. He has seen some clients walk away from a sale.
“What it adds is an extra layer of stress for the purchaser,” he says.
Financial crisis
The so-called “subject to loan clause” was commonly used during the financial crisis, as a way of protecting buyers against banks reneging on loan offers, because values had fallen, when it came to draw down the funds. While the lending market has since normalised, the clause remains pertinent – particularly to those who are buying in a new development, where their property might not be ready for up to two years.
As Geaney notes, a loan approval may only last for three to four months, but developers will also typically state in the contracts that the build can take up to two years.
“And no loan offer will last 24 months,” he says.
Cairn Homes for example, sold 40 homes off-plan earlier this year at Shackleton Park – but the homes won't be completed until summer 2018, while at Rathborne Park, units purchased this autumn also won't be ready until next summer.
A lengthier completion period can increase the risk that a buyer’s loan approval falls through, due to inability to get life cover, the bank’s valuation, or a change in circumstances.
Lose deposit
As Joe Thomas, of Drogheda-based O’Reilly Thomas Solicitors notes, if someone has to back out of a deal when they should be completing, they will then lose their deposit – typically 10 per cent of the purchase price. But it may be even more than that.
“The vendor can resell property, but in the event there is a loss, you may have to cover it too,” advises Thomas.
It’s understood that developers are faced with their own difficulties in selling homes on a conditional basis – the banks who are lending to them. If a developer only has an unconditional contract in place, banks can be unwilling to lend on the money needed to start or complete a scheme.
It has meant that more and more developers of new builds are now not including the clause in their contracts for sale. And where they do, they can limit them.
“What I have seen is builders saying: ‘We will accept subject to loan clause, but a month or six weeks before this house is ready, that clause drops out,” says Thomas.
Twenty-one days to sign
First-time buyers are also urged to tread carefully when it comes to rushing to sign contracts. Incentives such as free white goods now proliferate among schemes in the capital, with Castlethorn’s Grace Park Wood in Drumcondra offering integrated appliances, and buyers in Maplewood’s Ballycullen Green offered an electrical voucher. However, there is a price for this – expediency. Developers want contracts signed within 21 days or no free goods.
As such, Thomas urges caution to get the paperwork right – even if it is at the cost of such extras.
“I as a purchaser’s solicitor have a job to protect them and certify title at the end of the day to the bank, so I need to be able to raise queries and have them replied to, without the pressure from a purchaser saying, ‘I’m going to lose my white goods”, he says.
