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Claims Arising From Failed Off-Plan Investments

Claims Arising From Failed Off-Plan Investments

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In the last few years we have dealt with a large number of cases involving issues arising from off-plan investment schemes, often for clients based in East Asia.

Typically these schemes involve the payments of deposits of up to 30% or even more. It isn’t unknown for investors to pay nearly the whole price in advance. In return the investor often obtains very little more security than a notice at the Land Registry and the covenant of a worthless company whose assets amount to no more than a hole in the ground with a charge over it for amounts which far exceed its value.

The situation we are generally faced with is a developer who has run out of money and is desperately trying either to refinance or to sell the site, and a development which is not progressing in any significant way. The investor sees little or no prospect of the return of his money, and wants to be advised on whether there might be any hope of getting it back, and whether there might be any other way of making a recovery.

As to the first question if the developer is insolvent then generally there is nothing to be done except for checking that the contract is protected at the Land Registry as best it can be.

There is unlikely to be any point in suing the developer unless there happens to be a guarantor.

As to the second question, the remedy which the investor is most likely to have is against his solicitor or conveyancer (“solicitor”). Very often the investors in these schemes are fairly inexperienced – often they come from overseas, very often the investment in question is their first investment in UK property. The contracts they sign are complex, but their complexity often tends to disguise one simple fact: the money the investor pays is paid at once to a company which probably has no assets at all beyond the development site. Sometimes the company does not even own the site; the money is paid on the basis that it can be used for the purchase of the site, or even the defraying of expenses such as the cost of drawing up plans, ‘commissions’ and so forth.

Even if they are not fraudulent (and sometimes they are) these schemes are fraught with danger for investors who may, in effect, take on the whole risk of the development, and not only that but a risk which they have no reasonable way of evaluating and no control over. They are a world apart from the ‘deposit’ which a buyer pays on an ordinary house purchase, which is held by a solicitor. The investor really needs to understand what risk it is that he is taking, and the best hope he has of doing that is receiving clear, unbiased and targeted advice.

Unfortunately, very often he doesn’t. One reason for this is the pernicious practice of the developer semi-retaining a solicitor whom it then ‘recommends’ to the various purchasers. This solicitor naturally makes a reasonable amount of money from the business and probably will be keen to continue to do so. Causing buyers to withdraw by a clear-headed explanation of the risk may not be on his wish list.

It’s not uncommon at all to come across investors who don’t even realise that their money may not be spent on the development. Very often there was a glossy sales pack which the developer arranged to be distributed to potential buyers; this may contain misrepresentations of one kind or another which creates a false impression. Others think that the ‘deposit’ is ring-fenced to be used towards the construction of ‘their’ flat; this is seldom if ever true.

So what should the solicitor do? It seems to us that at a minimum he ought to do the following:-

(i) Explain to the client that the ‘deposit’ will not be held in any secure way.

(ii) Explain that there is no security for it.

(iii) Explain what it is that the money can be spent on – for example if the developer does not own the site and the money may be spent on that, say so. Can the money be used to build blocks other than the one the client is buying a flat in (often it can be)? Does it have to be used on building the development at all? Is it paid out only against certificates of some kind, and if so what? (again, clients frequently believe that some certification process protects them; as a rule, it will do so only against fraud and even then only the cruder kind).

If this has been done and the advice is understood (or at least the solicitor has covered himself in the event that it is not – often enough the claim is that oral advice was given, but the client has certainly not taken in at a meeting what the solicitor claims was said), then there will be no claim.

However, that is not to say that if the above has not been done the client will have a good claim. There is a wide range between, on the one hand, what a decent solicitor would do and, on the other, what a negligent solicitor might do. One might say that in between there are solicitors who might be described as incompetent rather than negligent.

Which of those three possibilities – decent advice, incompetent advice and negligent advice – one is dealing with is often difficult to say. When we are consulted by investors who are unhappy about their solicitors, it is seldom the first, but to advise on which of the other two it is one generally needs to see the solicitor’s file. There is an old saying that a solicitor is not obliged to give commercial advice as to the wisdom of the transaction. No doubt that is true by itself, but on the other hand does a solicitor need to make sure that the client understands exactly what that transaction is, or merely to ensure that the documents carry into effect what he is instructed that the transaction is? It can be a difficult line to draw, but still, it is in this direction that investors (or, better if possible, a group of investors), generally need to look if they hope to recover their money.