When mainstream lenders tighten their lending criteria, usually following an economic downturn, such as the one being caused by Covid-19, property developers may look at alternative funding options.
The SRA has released a series of guidelines on potentially dubious investments over the years and buyer funded developments are referred to within these guidelines.
What are buyer funded developments and what are your options if they go wrong?
These type of developments can cover a number of schemes whereby the buyer’s money is used to finance development or refurbishment. This includes off plan purchases in residential developments. The funds come from the deposits of the individual buyers. The deposits are usually higher than the average conveyancing transaction deposit.
These schemes can fail for a number of reasons, including:
- Developers going into liquidation or administration
- Money funded by the buyers being used for other projects
- Lack of funding to complete the project
The buyer can be left severely out of pocket with no property to show for it.
The SRA guidelines to solicitors who are advising on these types of transactions include the following:
- Where buyers’ deposits are being used as an alternative source of finance to fund developments, their attention should be drawn to any differences between the level of protection in place over their funds and that which would typically be put in place by an institutional lender.
- Where you are acting for the buyers in these types of transactions, you must advise your clients fully about the transaction and how it significantly differs from the simple conveyance of an existing property (if appropriate, advising against entering into the transaction). In addition to the issues outlined above, we expect you to explain that:
- Buying a property not yet built or completed, i.e. buyer-led or subject to significant refurbishment, involves a substantial risk that the developer or seller could fail, and money will be lost.
- Promises of substantial returns can be misleading. Standard warnings in publicity about the risk of capital loss are therefore not enough to make sure that you have properly advised your client upon the risks of the transaction.
The Solicitors Disciplinary Tribunal may take these points into account when deciding whether to sanction a solicitor or not.
However, to see if you can establish a claim in negligence against your solicitor you will need to review your retainer, and any other relevant documents, to understand what duties your solicitor owed to you. For example, is it arguable that your solicitor was to provide advice instead of information in respect of the investment part of the transaction?
How we can help
If you have suffered a loss as a result of an unsuccessful buyer funded development project and would like some legal advice on the options available to you, please get in touch with Lynsey or another member of our expert team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online enquiry form.