Before the economic downturn, the buy-to-let market attracted increasing numbers of property investors that were able to negotiate substantial discounts from developers for buying off-plan in bulk. The investors would resell the properties to other buy-to-let investors, or for owner-occupation, and keep the profits on completion of the subsales.
Regency Flats Ltd v Boatport Ltd [2010] EWHC 1327 (Ch); [2010] PLSCS 159 highlights the legal and financial risks that investors face in such circumstances. The buyer entered into an agreement to purchase 171 flats and resold most of them while they were under construction. Unfortunately, a substantial number of the subpurchasers failed to complete because the value of the properties fell or they were unable to obtain a mortgage in the midst of the recession.
When the buyer failed to complete in their place, the developer had to renegotiate with the subpurchasers and reduce its prices. In subsequent proceedings between the parties, the buyer claimed that the developer was at fault because its delay in serving completion notices had increased the number of subpurchasers that failed to complete. The judge rejected that claim. He ruled that the developer was not in a position to serve completion notices until the properties were finished. In addition, the buyer had lost out as a result of the economic downturn, and not because of any delay.
Conveyancers will be interested in the weaknesses that the judge identified in the bulk purchase structure. The bulk purchase agreement obliged the developer to: (i) enter into contracts for sale with sub-purchasers in a prescribed form; (ii) give credit for the payments received as a result; and (iii) account to the buyer for any balance. If a subpurchaser failed to complete, the developer was entitled to determine its contract and require the buyer to complete instead. This meant that, although the buyer was responsible for introducing the subpurchasers, the latters contractual relationship was with the developer alone.
Consequently, when subpurchasers defaulted, the buyer was not entitled to negotiate with or seek an order for specific performance against them. In addition, it had no direct control over the determination of their contracts. The developer was entitled to determine the contracts immediately and to require the buyer to fund purchases at short notice.
A secondary issue related to the completion notices. The bulk purchase agreement did not stipulate the order in which completion notices had to be served if the flats were finished at similar times. With hindsight, it would have benefited the buyer if it could have deferred completion of the purchase of the unsold flats until the end.
The decision highlights the care needed when structuring bulk purchase transactions, especially if the buyer intends to resell the properties. It also illustrates the risks of subpurchasers failing to complete on time. Original buyers remain legally bound to complete their purchase, and would be well advised to ensure that they have sufficient funds available if they are called on to do so.
Allyson Colby is a property law consultant
