Paul Mahoney: Welcome to Proper Wealth with me, Paul Mahoney, the show where we discuss all things wealth creation with a focus on property. Joining me today is Rob Thomas from PLS Solicitors. Thanks for joining us, Rob.
Rob Thomas: Thanks for inviting me on the show.
Paul Mahoney: So, there’s been a lot in the news lately around off-plan purchases and new-build purchases, and some of the concerns or risk associated there. So perhaps we can start by talking about that. What has been the controversy?
Rob Thomas: The controversy has been I suppose since 2008 really, more and more developers have been setting up developments where they were not able to obtain bank funding following the financial crisis in 2008. So, they started to develop new models of funding, their schemes, whereby they would ask the buyers to contribute higher deposits, which would then be used towards the construction works or associated costs, professional fees for the development going forwards.
Rob Thomas: And the controversy more recently has come about because some of those developments may have fallen over, the developers have run out of funds, and that’s left the buyers then in a tricky position because their money’s obviously been spent, and they’re trying to recover that money back from the developers.
Paul Mahoney: Right, so the developers are struggling to get finance?
Rob Thomas: Yeah.
Paul Mahoney: Come up with the idea of having investors fund their developments, essentially so investor fund is at risk. And when there’s issues incurred, it’s the investor’s funds that they’re struggling to pay back. Is that?
Rob Thomas: Yeah, it is. These developments I suppose have been happening for the last five or six years. It’s a model that’s been utilized for quite a long time.
Paul Mahoney: Right.
Rob Thomas: But you’ve obviously got buyers that are investing from the UK and internationally as well. Some deposits could range from 20% up to 80%. Obviously a traditional deposit for a residential purchase in the UK is 10%, and it’s always been 10%. I think the problem for some investors is that maybe they’ve not been advised properly about the level of deposits that they were contributing to the purchase price, or what those funds were actually been used for as well, and that’s where we have a problem.
Paul Mahoney: Okay, and with regards to the deposit amount, whether they were to be 10% or more, are there ways of mitigating the risks associated with larger deposit amounts?
Rob Thomas: Yeah, there are ways of mitigating the risks. I think the first thing that these buyers need to do is instruct a specialist firm that work on new-build and off-plan developments. It’s a very, very specialist area of the law. It’s always changing, and there’s a huge different in contracts between what you might receive from one developer and another. So, it’s important to have a firm that understand all the intricacies of the contracts and the implications that certain clauses could have for those buyers further along in the process.
Paul Mahoney: Yeah, okay. So, using a specialist that actually understands the off-plan and new-build purchase process.
Rob Thomas: Yeah, very, very important.
Paul Mahoney: Yeah, that’s something I absolutely agree with, because of course if they don’t know what they’re advising on, then you can’t rely upon the advice.
Rob Thomas: Absolutely. Really, really important. And then I suppose once you’ve instructed your specialist firm of solicitors, it then comes to various different mechanisms that can be put in place to help protect that deposit. So, the obvious things that I would think of immediately are having a contract that could be conditional upon certain protection being on place. So, you could have a deposit that’s paid for example 30 or 40%, and you would have deposit bonds that would be put in place. One bond could protect potentially 20%, and they may have a warranty provider that also protects 10% as well. So, you could have 30% that’s covered under different insurance policies.
Rob Thomas: Now, you’d want to have provisions in the contract that will make sure the deposit’s protected until those bonds have been triggered. So, once those bonds are actually on risk, then the money can be released to the developer. Now, most of those bonds will generally cover buyers in the event of a seller insolvency, so if the developers go into insolvency, the buyer would be covered. If there was any fraud from the developer, or they’ve just simply breached the terms of the contract, so the property wasn’t ready by the long stop date that was stipulated in the contract, then those bonds would kick in at that point as well.
Rob Thomas: The one caveat I’d always advise the buyers on when it comes to bonds is that you also need to make sure that they’ve done some due diligence on the bond provider. There’s a difference between having a bond provider that’s an A rated UK FCO regulated insurer, and a bond provider that’s based in another country, where the bond’s been sold for a very small amount of money to the developer, and probably haven’t got any intention of [crosstalk 00:04:57].
Paul Mahoney: Okay, so the bond needs to be reliable.
Rob Thomas: It needs to be reliable.
Paul Mahoney: So, I suppose if the client is placing more than that sort of standard 10%, which it seems outside of London it generally is a bit higher than 10%, if they are being asked to do that though, it is ideal to have those covers in place to mitigate the risk, which is like a bond. I believe there are some other types of covers as well? But they all do a similar type of thing, don’t they?
Rob Thomas: Yeah, you could have insurance bonds that would cover it. Or even the simplest way to do it is for the deposit all to be held by the seller’s solicitor as a stakeholder, which means the money’s now protected up until point of completion, but that obviously then defeats the purpose of the developer being able to use those funds.
Rob Thomas: It’s a model that has worked successfully across a number of developments across the UK. But it’s not worked as successful on some others. So, that’s why I suppose off-plan work now has become more of a topical issue, and why it’s so important that people get the right advice.
Paul Mahoney: Right, so either it’s held by a solicitor, or if it’s released it’s covered by these bonds?
Rob Thomas: Yeah, exactly. I mean normally if an investor is purchasing a property or somebody is buying their first home, then the deposits will always be held by stakeholders, they’ll always be held by the seller’s solicitors, which means they’re protected. So, if the seller is in default, then the buyer can rescind the contract, which means terminate the contract, and get their money back. Obviously it’s different, different rules apply when it comes to off plan investments where they’re paying significantly higher amounts of money.
Paul Mahoney: And I suppose the reason for that is because the off-plan sales generally help fund the development in some way, don’t they?
Rob Thomas: They do.
Paul Mahoney: Whether those funds are released, or whether the development finance can be drawn down based upon the number of sales, that’s what kind of helps them get it off the ground I suppose.
Rob Thomas: It does help them get it off the ground, and yeah, it just helps them to get those first few sales across the line. Most of these developers now will have good funding lines in place, and that’s something that solicitors should be checking before they begin acting for buyers on a site. Those lenders will normally have stipulations whereby funds can only be released at certain stages, or can be drawn down by the developer at certain parts of the process, which would normally be signed off by a monitoring surveyor. So, the lender would appoint a monitoring surveyor who would visit the site at key points in the process, and sign a certificate off to confirm that the works are where they should be at that point. And then a lender would then release more money.
Paul Mahoney: Yeah, okay. That’s great, we’ve covered some great little due diligence boxes there to tick when people are buying off-plan as far as making sure funds are protected in some way. I suppose using a specialist conveyor, firstly so they know what they’re advising on, but secondly so that they can say that that first box is ticked and the money is safer. And I suppose all of that helps mitigate the risks of funds being at risk with buying off-plan.
Rob Thomas: It does, yes. I mean we always say to buyers buying a property is risky. It’s like buying anything else. Buyers have to rely upon doing their own due diligence as well as everybody else, and investments can go up. People can buy properties and they can go up dramatically. But there are risks to buying property at the same time.
Rob Thomas: So, as well as trying to mitigate any of the risks with the seller’s solicitors, the other main point is to make sure the buyers received very clear advice from their solicitor as to those risks that are involved, so the buyer can make an informed choice as to whether they want to proceed with that purchase or not. And that then comes down to their report on title that’s issued by the solicitor to the buyers to make sure they’ve covered everything off that’s important within that report.
Paul Mahoney: Yeah, okay. And I suppose in getting that result they can actually then rely upon it, can’t they?
Rob Thomas: They can rely upon it.
Paul Mahoney: Because they’re getting that guidance, they can have a bit more peace of mind. It’ll help them sleep at night a bit more about what they’re doing, because they’ve used a specialist in that are and they’ve got the advice and followed it.
Rob Thomas: They can, yeah. And they can read that report, and they need to make sure they’ve read the report. And they can certainly rely upon what’s in that report. There’s other things that can be done as well in terms of mitigating potential losses. One thing that firms should be doing now is registering notices against the seller’s title. So, once exchange of contracts has taken place, the buyer’s solicitor should be registering what’s called either a unilateral notice or an agreed notice against the developers title.
Rob Thomas: And what that notice does is it puts third parties on notice that there is a purchaser who has an interest in that site, which is an estate contract, which is the contract that exchanged.
Paul Mahoney: So essentially like a charge?
Rob Thomas: Yeah, a little bit like a charge. I mean it is similar to a charge, it hasn’t got as much teeth as a charge because a charge will actually contain restrictions on the title as well which will not actually allow the developer to do anything with that site until that restriction has been satisfied. The notices do have some legal standing though. And there is recent case law that says that if a UN1 or an agreed notice has been registered against the title before a funders charge, then those notices could take priority over the funders charge.
Paul Mahoney: Okay, and I suppose that covers the buyer in the worst case scenario where the developer were to go insolvent and there was the sale of the asset, they would therefore have an interest in that sale.
Rob Thomas: They would have an interest in that sale. And that protection can save a lot of buyers in a worst case scenario. But it does all boil down to when the lender’s charge is being registered on the seller’s title, as compared to the buyer’s charges, or the buyer’s contracts. So, if for example you have a developer that has just launched a development and they’re taking 20, 30% deposits on exchange and there’s no funding in place at that point, then those buyers, as long as there’s a good growth development value to the site, those buyers will register those notices and they should be first in line if there’s a problem.
Paul Mahoney: I suppose there will always generally be a gap between what the lender is lending and what the GDV or the site is worth in any case, wouldn’t there?
Rob Thomas: Yeah.
Paul Mahoney: So, there should be a reason or a purpose for that title registration in any case.
Rob Thomas: Yeah. And I think probably the most dangerous time for an investor is probably near the beginning when works have been carried out on the site, but maybe perhaps they’ve not seen as much value, marriage value on the actual value of the site at that point.
Paul Mahoney: Okay, that makes sense.
Rob Thomas: So it’s really just about making sure that anything that can be done is done on behalf of the buyers and that they’re aware of that, and for the buyers to make their own choice.
Paul Mahoney: Great. That’s all we’ve got time for now, but join us after the break with more from Rob Thomas about the off-plan and new-build purchase process.
Paul Mahoney: Welcome back to Proper Wealth, with me Paul Mahoney. Joining me today is Rob Thomas from PLS Solicitors.
Paul Mahoney: So, we spoke in-depth before the break regarding how to cover your deposit, how to mitigate some of the risks associated with off-plan purchases, and have more confidence that your money is safe. What we didn’t really speak about what was the due diligence on developers and how to have confidence in the company you’re actually buying from. So, if we could just talk through some of the key things to look for there?
Rob Thomas: Okay, well I think probably the first key thing that anyone should look out for is previous projects that have been carried out by that developer. Some developers will have probably carried out 10 to 15 projects, and it’ll be very easy to find out where those projects are based, located, and whether they’ve completed or not. I mean most developers will now carry out the developments in an SPV, that’s a special purchase vehicle, which will be recently set up at Companies House.
Rob Thomas: So, you’re not going to find information on that SPV if you do look into it on Companies House, but you can certainly find out the directors behind that company. Carry out some investigations on those individuals and whether they have completed previous developments. And that’s one of the things that we will try and do ourselves, and I think every solicitor should be doing that.
Rob Thomas: The other things to look out for are the paperwork that’s supplied by the solicitors. We’ve received contracts, I’m sure other solicitors have as well, where there’s lots of important provisions that are missing from those contracts, such as for example how the deposits are being held. Whether the contract is conditional upon planning. Whether there’s a section 106 agreement in place, and whether the contract is also conditional upon that. How the developer will deal with snagging following completion. Whether the buyer’s able to terminate the contract if there’s been changes to the actual plot size of the apartment that they’re purchasing in between exchange and completion.
Rob Thomas: Now, if developers have omitted a number of these important provisions from the contract, that would suggest to most solicitors that they’re using a firm that doesn’t really know what they’re doing on a new-build side, on the plot sales. So, that for me would be an indicator that you need to be a little bit careful with this particular developer.
Paul Mahoney: Okay. And I suppose they’re probably key things to look for, because they give the buyer little bits of protection in those scenarios, don’t they?
Rob Thomas: They do. They give the buyer bits of protection, and they also give an indicator at to the actual developer as well and how they work. If the developer’s very unwilling to amend some of those provisions in the contract, that to me would be another highlight that I’d highlight to my client and say, “Look, that concerns me.” I think most firms would be doing that.
Paul Mahoney: Okay, so I suppose the more experienced developers would be familiar and comfortable with having those things in place in any case, wouldn’t they? Whereas the others that are just trying to protect themselves may not be that flexible.
Rob Thomas: Yeah. If you’ve got a developer that’s not really done this before, or they’ve not got a lot of experience at completing previous schemes, then you’ll find there’s not often much mechanism in that contract to protect the buyers. And if they’re willing to amend it, then that’s a flag. I mean other things that one should look out for are the individuals behind the developer as well, just check if they’ve got any black marks against them. If they’ve had liquidated companies before. Sometimes you’ll have directors that have liquidated 15 to 20 companies in the last three or four years.
Paul Mahoney: Right, obviously not a good sign.
Rob Thomas: That would suggest that they’ve got a track record of not finishing projects, or maybe other areas of work that they’ve been involved in previously.
Paul Mahoney: Okay. So, getting a feel for who’s involved and looking beyond the SPV. Often to look at the brand, or people that are behind that and what they’ve done in the past. As you say, if you’ve done 10 or 15 successfully, they’ve delivered on time and what they promised, and all that sort of thing, and they’ve got good feedback. That’s probably a nice little tick in that box.
Rob Thomas: It’s a great tick. A full company search on the seller as well needs to be done by the buyers. So, it’s really just finding out as much information as you can. Maybe go and visit previous projects as well if they’ve got some projects that are ongoing. Have a look at them, see how they’re progressing. Are they to time and on budget? If they’ve gone 12, 18 months over the long stop date, that would suggest to me that there’s a problem with that developer, potentially. Although there could be valid reasons behind that.
Paul Mahoney: All right, great. So, we’ve covered some due diligence points there, which is great. If we could just talk now through the overall purchase process. Start to finish, for those that perhaps might not be that familiar with it. Or may have experienced it in the past, but just to make sure that they have a bit of a process to follow and they know what to expect.
Rob Thomas: Okay. So, the buyer, depending on whatever property they’re looking to purchase, whether it’s an off-plan property, or just a normal build buy-to-let property, needs to make their offer for the property and have that offer accepted. They would then need to instruct a firm of solicitors to act on their behalf. They’d need to legally instruct the solicitors, agree the fees beforehand, and then the solicitors would wait to receive the draft contracts from the seller’s solicitors.
Rob Thomas: The buyer’s solicitors will then review those contracts and raise inquiries, and also apply for searches. If the buyer is purchasing an off-plan development, or a new-build development, there should be a large number of inquiries that need to be raised by the solicitors. And those inquiries will relate to issues such as planning, building regulations, warranty certificates. They’ll need to apply for their own searches. There may be specific legal queries in relation to convenance that affect the site. Access, need to make sure that the building can be accessed from an adopted highway.
Rob Thomas: So, there need to be all the appropriate rights in place to ensure that the buyer’s investment I suppose is maximized. So, once the buyer’s solicitors have received replies to their inquiries, they will then put all that information together and they’ll report to the buyer. And that could be between 10 and 20 pages of reports, it’s important that the buyer reads that report and raises any queries that they’ve got with their solicitor.
Paul Mahoney: And that essentially points out the things that the buyer should be aware of?
Rob Thomas: Yeah, it will point out the things that the buyer should be aware of. I mean if there was a serious issue with a site, and for example access, there was a massive access problem, and that issue couldn’t be addressed by way of an insurance policy, which is something that developers will often use these days, then the buyer’s solicitor should really be advising the buyer not to proceed, because there could be a serious impact on the buyer’s price and future valuation.
Rob Thomas: But if they’re just merely risks that the buyer needs to be aware of, then those should be flagged to the buyer.
Paul Mahoney: So I suppose in that case of the risk, or the advice of not proceeding, I assume the conveyancer would usually advise in a way of potentially fixing that, or asking for amendments.
Rob Thomas: Yeah, they would ask for amendments, they would try and amend the contract. They would see if there was any way that they could address those title issues in relation to the property or the development. And then really it’s a question of presenting that information to the buyer. Now, if the buyer’s got a mortgage lender, then there’ll be a number of conditions that will have to be satisfied for that lender anyway. For example, if the buyer’s purchasing a leasehold property, if the ground rent for that property is over £250, for example if it’s outside of London, then that property could be classed as an assured short hold tenancy under the Housing Act, 1988.
Rob Thomas: And that could have serious implications for the buyer. If they then fail to pay the ground rent on that property, because the landlord could forfeit the lease. So, there’s a number of questions now that buyer’s solicitors should be raising, especially when there’s a mortgage lender in place, but even if there is no mortgage lender, there’s a lot of important questions that should be asked.
Paul Mahoney: Okay, so that £250 mark, that’s something that lenders have identified recently as a sort of benchmark that they’re working on is it?
Rob Thomas: Yeah, lenders now want to be advised if there’s ground rent that is currently under £250, but could be increasing to above £250, outside of London. If it’s within London, then it’s over £1,000. So, solicitors have to be extremely vigilant and careful with their due diligence and their inquiries that they’re raising in relation to the property.
Paul Mahoney: Right, okay, that’s interesting. Are there any other key things … so we’ve spoken through the process, some of the key things to look for. And I suppose expect from a conveyancer as a buyer. The importance of actually reading the report and understanding it. And I suppose the reason that’s so important is the contracts are kind of written in gobbledygook sometimes, aren’t they? They’re quite difficult to understand as a lay person.
Rob Thomas: Yeah.
Paul Mahoney: Whereas I suppose that report, you would hopefully translate some of that information in a way that the buyer can understand.
Rob Thomas: Yeah, absolutely. Look, the solicitors should be trying to simplify what’s in that contract as easily as they can. I mean contracts on a new-build property, or an off-plan, which is obviously the majority of what we’re talking about today, can be quite long. So, they could be between 20 and 30 pages long. Obviously if you’re reporting to a buyer, you don’t want to be writing 20, 30 pages of translating the contract. So, what we would do, and what all solicitors should be doing is summarizing the key aspects of that contract and implications that they could have for our clients.
Paul Mahoney: That’s an interesting point there, Rob, that you mention so far as the importance of simplifying the report so the buyer can understand. I suppose it therefore probably makes sense for a buyer to use a conveyancer that’s already familiar with the developer and or the contracts?
Rob Thomas: Yeah, it does make sense. I mean you’ll find there are a number of firms that will be specialists in new-build and off-plan work. The likelihood is that they will have acted for other buyers on that development. And they will be familiar with the contracts and the developer and the setup. I mean to an extent yeah, that could save the buyer quite a lot of time in terms of the process, because they haven’t had to reinvent the wheel each time a buyer appoints them to act on their behalf. So, what should happen is when the buyer instructs that solicitor, and if they have acted for previous buyers on the same development, then they can report to that buyer fairly quickly once they’ve been instructed.
Paul Mahoney: And I suppose time is quite important when buying off-plan, isn’t it? Because a lot of developers want buyers to exchange in 30 days, which sometimes they’re flexible on, but if you can use a conveyancer that can move quickly and get things to you quickly, then there’s more likelihood you’re going to get the exchange done more quickly.
Rob Thomas: Very much so, especially if you’re looking at the actual model that some of these developers are utilizing now, which we discussed earlier, where they are openly wanting to use the buyer’s money, or some of the buyer’s money to help fund the work. That model will only be successful if the due diligence has been done properly by the solicitors and buyers can move quickly once they’ve instructed the firm to act on their behalf.
Paul Mahoney: Okay, great. Well, look, all very good points there for the buyers to learn from, and to tick those due diligence boxes. That’s all we’ve got time for now, thanks for joining us on Proper Wealth with me, Paul Mahoney. Join us next time for more on wealth creation, with a specific focus on property.