Expect more developers to pursue buyers through the courts to complete contracts

THE PROPERTY industry is about to turn nasty. Hundreds of investors and first-time buyers who paid deposits and signed contracts for new homes are under increasing pressure to complete the purchase or face court action.

Treasury Holdings was possibly the first large developer to pursue defaulters through the courts last autumn and it has largely paid off, with most finished apartments at Spencer Dock in the Dublin docklands now paid for. Many other developers who sold homes off-plans in 2007 and 2008 have also found it hard to get buyers to wrap up deals at a time when values are down so dramatically, from 40 to 50 per cent even in good Dublin locations, and by more in some provincial areas.

Most builders are reluctant to attract public attention by going to court to seek an order for specific performance of a contract. Their reluctance to take to the public stage is understandable given the profits they made over the past decade.

The changed circumstances – where many purchasers are taking salary cuts and losing jobs – have not made it easy to implement these contracts but, rather than go for the jugular, many builders are offering discounts in the hope of persuading purchasers to fulfil their legal obligations.

But a substantial number of purchasers are still holding out in the hope of persuading builders to drop prices to current values. This is unlikely to be a runner for builders, particularly those who paid top dollar for sites and high local authority charges at the height of the property boom, as well as construction costs way above what they are at present.

Carolyn Strauss of Savills says they have spent considerable time renegotiating mainly 2008 contracts for developer clients. In cases where purchasers had been unwilling to co-operate they requested that the developers’ solicitor take over the file and chase the purchaser through their solicitor. Savills has closed sales on 90 per cent of the units where there are signed contracts.

Strauss says that in some cases where purchasers had lost their job or suffered a significant loss of earnings, a decision had been made to hold on to the initial deposit and contract fee and to release them from the legal contract. “All of our developers were reluctant to take these contracted purchasers to court even though the law, in my view, would have upheld the legally binding contract in place.”

Many other developers are not so accommodating, because they are under pressure from banks to produce the proceeds of agreed sales. One developer has served 28 days notice of his intention to take legal action against over 200 purchasers in a south Dublin scheme. Another warns that there will be “no concessions and no running away”.

Inevitably, some cases will end up in court but with many buyers – particularly investors – unable to raise the required mortgages it is questionable whether a successful court action will amount to much.

Frank Conway of Irish Mortgage Corporation says lenders are not advancing monies to consumers who may have got approval during the boom. “This is leading to a variety of problems but the logic of the banks is simple: if consumers no longer have the financial capacity to service a debt then they are no longer lending. This has and will lead to legal problems. The most obvious is the breach of contract.”

Conway says mortgage deals are available for investors but lenders want higher deposits (15 to 25 per cent) and charge 1-1.5 per cent over standard rates.