Picture the scene. An off-plan investor contracted two years ago and paid substantial deposits. The longstop date has passed and construction is continuing – but slowly. The investor is losing faith in the developer and is impatient. He has the right to rescind the contract and require the developer to repay the deposits. What should he do? Should he hope for the best and do nothing or should he rescind?
Where you stand on an issue does of course depend on where you sit, and if you’re an experienced investor who has so far done well out of this sort of investment then you might well decide to wait and see. Appetite for risk and the market will be factors the investor will take into account. Where we, and other litigation lawyers, sit is somewhere very different. Day to day we live in a world of claims and disputes. Therefore is it any wonder we’re more sceptical than most! Please bear that in mind in what we are about to say.
What does it mean to rescind a contract for the purchase of land or, in the context of this article, probably an apartment? In general it means cancelling the contract. This ends the seller’s obligation to sell and the buyer’s obligation to buy. If the development is later completed and the buyer changes his mind he would have to enter into a new contract. Most off-plan contacts include the right to rescind and the right is usually exercised by giving written notice to the seller. That is the easy part of the process.
Where there is a right to rescind there is usually an obligation on the seller to return the deposits. These are usually substantial sums of money – often six figure sums. A typical contract would require the deposits to be refunded within a certain period after notice is given to rescind.
No doubt there are cases where contracts are rescinded and deposits returned but we never see those cases! The cases we see are ones where investors rescind and by doing so trigger their entitlement to the return of their deposit but nothing, or next to nothing, happens. The investors are either ignored or persuaded by the developer to allow them more time for a variety of reasons, eg refinancing, the imminence of completion. Investors are often inexperienced and more inclined to hope for the best than take any positive action. This is a common reaction even in cases where the only asset the developer appears to own is the property under construction, and often the developer is an off-shore company!
Experience shows that if an investor has decided to rescind and claim back his deposits he should take action as early as possible and certainly while the developer has a positon to protect. There is probably no point in doing so when the developer is heading for administration or liquidation. Timing is everything.
Rescinding an off-plan contract is straightforward and it should be relatively inexpensive, but the next step calls for more resolve. If the developer is not willing to refund the deposits then the investor can – and should if possible – take proceedings, and winding up proceedings usually have the most impact. If these steps are taken at the right time there is a good chance that the deposits will be refunded or protected in some other way, eg a director’s personal guarantee.
It’s important to remember that any question of rescission, or recovery of deposits, is only likely to arise after the longstop date, which will probably be at least 12 months after the parties have entered into the contract. By that time most of the legal work will have been done by an investor’s conveyancer. His fees will have been paid and he will be dealing with other transactions. If he is asked will the conveyancer be willing and able to provide advice on rescission and enforcement of the developer’s obligation to return the deposits? While the conveyancer will probably be willing to give general advice he may not have the insight to give the investor what he needs at this point which is firm and specific advice about enforcement. Although he may be reluctant to do so it is in the investor’s interest to obtain specialised legal advice at this stage.
If an investor rescinds but does not put the developer under pressure to return the deposits then he is likely to join the majority of investors who will in due course go into battle with administrators and liquidators for years. In the end he may secure a dividend but it will probably only be a fraction of his original investment.