【New Build Purchases – What you need to know】
There are many benefits and attractions to purchasing off-plan. Not only do you avoid having to co-ordinate your move-in date with a seller with a related transaction and a long chain, but generally new properties will be more energy efficient and require less maintenance. All of the fixtures and fittings will be brand new and essential white goods are also included. Moreover, developers can offer some attractive incentives such as Stamp Duty contributions, furniture packs and legal fee contributions.
Purchasing a property so far in advance of when it has been completed can feel alien and risky, but depending on the prevailing market conditions, there is the possibility that the property could increase significantly in value after it has been built. This is because you will be purchasing the property at the current market price at the point of exchange of contracts and not at the market value once it has been completed. Therefore, whether you are purchasing as an investment or for your own occupation, purchasing off-plan is often a viable and attractive option.
There are many differences with off-plan purchases to your “usual” conveyancing transaction. You will need to ensure that the solicitor you instruct to act on your behalf is well versed in new build transactions and is able to recognise and guide you through the inherent risks and pitfalls that may often arise.
Reservation Fees and Exchange Deadlines
Before taking a property off the market the developers will usually require a reservation fee – generally around £2,000 but may vary between developers. This reservation fee will be deducted from the deposit payable to the developer’s solicitors upon exchange of contracts. Since it is common for there to be a high demand for off-plan properties the developers will also impose an exchange deadline – usually 21 or 28 days – from the day your solicitor receives the contract pack from the developer’s solicitors. Therefore, it is imperative that your solicitor is able to act quickly to ensure that you can meet this deadline and avoid missing the deadline and risk forfeiture of the reservation fee.
Deposits and Construction Sums
Exchange of contracts is when the transaction becomes legally binding. At this stage the developers will require 10% of the purchase price to be paid to their solicitors. Certain developers may require further deposits or staged payments to assist with the construction of the development, this will be specified in the contract. Moreover, more often than not the contract will specify that these sums will be held as “agent”. This means that as soon as the developer’s solicitors receive the monies they are able to release them to the developer. As you will be entering into a legally binding transaction in advance of completion, a lot of things can happen in that period of time. For instance, the developers may become insolvent and go into liquidation. Therefore, it is important that your solicitor understands the risks and takes steps to protect your deposit and any further sums which you have in essence advanced to the developers.
Usually the New Build Warranty Provider will act as a deposit guarantee should the developers fail to complete because they are in liquidation or by reason of fraud. However, some New Build Warranty Providers will only usually guarantee a maximum of 10% of the purchase price or £100,000 (whichever is lower). Therefore, when agreeing to pay further deposits or construction sums, which are not protected, you should consider the size and reputation of the developer before agreeing to them. Subject to the developer’s agreement, you should also consider requesting that any unprotected sums are held in a solicitor’s client account pending completion.
Some investors may wish to sell the benefit of the contract to someone else before the property has been completed. This can be an attractive option as you will be able to take away the profit made on the transaction and the original deposit (and any construction sums paid) up to that point. Moreover, you avoid paying Stamp Duty and HM Land Registry Fees. However, if this is your intention it is important that the contract allows you to do so.
As a seller in an assignment, it is important to note that just because the transaction has completed you do not fall out of the picture. Should your buyer fail to complete then the developers can legally look to you to complete the transaction and you will be responsible for any default interest and notice fees. Practically speaking this may be unlikely as the developer will just retain the deposit paid and remarket the property.
As a buyer, it can may be difficult to obtain mortgage finance on an assignment and very few lenders offer finance on these transactions. Therefore, more often than not a buyer will usually be financing the purchase through cash, which of course also restricts the potential market for the seller.
It is quite common for purchaser to proceed to exchange without the benefit of a mortgage offer. This is because the completion date is so far in advance and mortgage offers usually expire before then. Most lenders will have offers which remain valid for up to 6 months, therefore it would be prudent to start applying up to 6 months from the anticipated completion date. It would be best to speak to your financial advisor who will be able to advise you further.
There is an element of risk in that you have committed to a legally binding transaction without any guarantee that you will have the finance in place upon completion. Of course, personal circumstances may change and it will be important to speak to an independent financial advisor who will be able to give you a better idea as to how to finance the purchase.
Once a developer serves the completion notice you will need to complete the purchase, so if you do require mortgage financing you must ensure that you have a valid mortgage offer in place at completion.
Completion on Notice
This is the notice that the developer’s solicitor will serve on your solicitors confirming that the property is substantially complete. Usually the contract will stipulate that you will have around 10 working days to organise your financial affairs and for your solicitor to carry out the necessary pre-completion searches in readiness for completion.
The contract also usually provides you with the opportunity to undertake an inspection of the property to see whether there are any snagging issues that need to be rectified prior to completion. The contract will usually provide that if any snagging issues are minor in nature then there will be an obligation on the developer to rectify these either before completion or as soon as possible after completion. However, on the basis of this obligation, the contract usually also stipulates that completion cannot be delayed as a result of snagging issues.
Upon completion you will need to provide the balance of the purchase price less any reservation fee, deposit and further deposits you have paid up to date. Included in these sums are usually any engrossment fees (a fee for the developer’s solicitors producing the final form lease or transfer), a first contribution towards service charge and a proportion of ground rent attributable to your period of ownership.
This is a date in the contract built in to protect both the buyer and the developer. On the one hand, the developer cannot guarantee exactly when the property will be completed and at the offset can only give an anticipated legal completion date as to when they think the property will be ready. They will be relying on contractors who may not deliver and the UK weather may also cause delays in construction. Therefore, the developers will want to include this date into the contract to protect them against any unforeseen delays. On the other hand, a buyer will not want to be left in limbo, bound to a contract with no deadline in which the developer must complete the build by. If the developers are adhering to the Consumer Code for Home Builders, the longstop date in the contract will usually be 12 months from the anticipated legal completion date. There will be little or no room to negotiate the longstop date in the contract for the reasons listed above, but should the developers not serve the completion notice by this date then you will have the option to cancel the contract and any deposits and further deposits paid will be returned to you.
Should you have any questions about this, or any matter in relation to new build property, please contact Jasper Yeung at email@example.com or China Consulting Consortium.