Landmark ruling sees developers awarded damages from buyers who reneged on contracts

A court in Bristol has awarded damages of £133,000 to Prestige Homes South West after an investor pulled out of a deal to buy two flats at its Zero 4 development in Plymouth.

The unnamed investor was one of 30 people who had paid deposits for flats at the development but who had then reneged on the deals, preferring to lose their deposits rather than complete their purchases in a falling market. The company is expected to sue a further eight investors and has reached agreements with several others.

With more than 300 similar cases involving other developers reportedly waiting to be heard in London alone – and many more expected to follow – this could well turn out to be a hard lesson for property investors,  some of whom may have been first time individual investors and even buyers who intended to actually live in the property but could not obtain mortgage finance once the value of the property fell.  Some may even face the possibility of bankruptcy.

Despite no doubt being advised by their solicitors (as we do and in writing) of the risks of not completing on an exchanged contract, some buyers do not take on board that it is not just their 10 per cent deposit (or reduced deposit in lieu of 10 per cent) that is at risk if they fail to complete. They are also liable for damages, being any reduction in the sale price of the property in the intervening period, plus marketing and legal costs and expenses the developers incur in remarketing. In a growing market, developers would generally just take the 10 per cent deposit as compensation and resell, but in a falling market they are taking advantage of the fact that they are contractually able to recoup their losses.

This may seem unfair on the buyers, but in the opposite scenario where a plot was worth more on completion that it was on exchange, would buyers be willing to pay a higher price than they contracted to? The situation has to be looked at from more than one angle.