Developers can’t always force buyers who lack funds to complete. And as a recent test case shows, the difficulty is knowing when it would be better to apply for damages
Titanic Quarter is Harcourt Developments’ huge and impressive regeneration of Belfast’s Harland & Wolff shipyard (from which RMS Titanic was launched).
Three years ago, Neil Rowe agreed to buy off-plan one of the scheme’s 7,500 apartments for £264,000. He was a mechanical engineering graduate employed in the construction industry on an annual salary of £31,000. He owned a £200,000 home with an £87,000 mortgage. With equity of more than £100,000 he sought to upgrade. Like elsewhere in the UK, before the fall in residential property prices, the rises had been high and fast.
Rowe paid a £26,000 deposit. Completion was to be 14 days after the architect’s practical completion certificate, which came in September 2009. A notice to complete was served on Rowe but he did not complete. Unfortunately he had lost his job a year earlier. Having not obtained new employment he had sold his home for £120,000 out of which he redeemed his mortgage and moved in with his parents. It was impossible for Rowe to borrow enough to complete.
Harcourt, like other developers and vendors facing a defaulting buyer, sought a court order to require Rowe to complete the purchase and pay the remaining 90%
of the price. The order is called specific performance. Before the recession, buyers would often obtain it to require vendors to complete on sales of properties that had risen in value since the sale contract was concluded. This trend has reversed.
Specific performance will not be ordered if damages would adequately compensate the claimant. This is partly why it is so rare for the courts to order building contractors to complete construction contracts. Damages will invariably suffice if the claimant has not also contracted to buy the freehold or leasehold in the site: the claimant can usually procure another contractor to complete the works and claim its extra costs from the original contractor.
Developers and vendors may be less willing to contract with buyers with financial issues or may set extra preconditions to sale contracts
The difficulty in Rowe’s case was that damages might be inadequate because he had no money with which to pay them. However, as the High Court of Northern Ireland noted, that position could have changed by the time a judgment came to be enforced.
On 26 August, Mr Justice Deeny declined, on a summary judgment application, to grant specific performance. He held that Rowe had a clearly arguable case that it would be impossible for him to pay the balance of the price. As another judge put it: “The court should not make an order that will beat upon the air.”
This case was chosen as a test case as to whether a defaulting buyer’s lack of funds can justify a court in refusing specific performance. The judgment will be studied by parties in a similar position - and there are many in the UK at present. For instance, Estates Gazette has reported that between August 2008 and December 2009, eight parties lodged almost 300 claims against defaulting off-plan buyers.
Specific performance is also unavailable against corporate buyers if it is impossible for them to pay (as the Court of Appeal confirmed in 2002).
However, each case will turn upon each buyer’s financial circumstances. And therein lies the difficulty for developers and vendors. Before seeking specific performance, they should assess the financial worth of the defaulting buyer. Even then there is no guarantee that a court will make the order, given that it is a matter of discretion (albeit under a well-settled test). As a result, developers and vendors may be less willing to contract with buyers with financial issues or may set extra preconditions to sale contracts. This is particularly a concern when completion is to be deferred for some time.
As Rowe’s sale contract was not subject to finance, he gambled on his ability to buy enduring until completion occurred two years later. But even with sale contracts
that are subject to, say, the buyer using reasonable endeavours to obtain finance, if the finance - in breach of that duty - is not obtained, the developer/vendor will still not obtain specific performance if the buyer cannot complete.
Developers and vendors may also seek
from defaulting buyers remedies other than specific performance (which is futile anyway if the buyer cannot pay). Of course, exploring alternative payment options involves a cost that will somehow have to be defrayed.
Harcourt has been allowed to retain Rowe’s deposit and could seek about £30,000 in damages. It must resell the apartment concerned and deal with other defaulting buyers. In the meantime the Titanic Quarter scheme steams on for completion in 2012 – just in time for the centenary commemorations of Titanic’s loss.