UK Property - Must You Complete After Exchanging Contracts?

Question – Must you complete on an off-plan property that you had exchanged contracts on? 

Good question. If you are buying an off-plan property in the UK, you will first be asked to pay a reservation fee (usually ranging between GBP 1000-5000) to book a unit. The developer and sales agent will then take this unit off the market.

You will be given a deadline to exchange contracts, during which at least 10% of the purchase price (less the reservation fee) will be paid through your solicitors.

Understand that unlike say Singapore, most of the payments towards a UK property occurs at completion. For our properties, the standard was 10% to exchange contracts, and then 90% at completion.   Sometimes, the developer may ask for another 10% say 12 months before scheduled completion.  Make sure you negotiate the payment schedule before you exchange contracts.

We have have seen nothing like what we have to pay in Singapore. By the time the off-plan property TOPs in Singapore, you would have already paid 70% to 80% of the sales price to the developer!

After you reserve your unit, you will have to appoint the solicitors who will handle the purchase for you, and work towards the exchange of contracts.

You can pull out after the reservation stage if you change your mind; whether you lose your reservation fee will depend on the developer and selling agent’s policies.

However, if you have second thoughts, this is the time to pull out, and not any later. Once contracts are exchanged, things become legally binding. You are contractually obligated to complete, unless you manage to do a sub-sale.

Sub-sale?
Yes.  Another term, is to flip the property before completion.  Take note, however, that this is not common in the UK, though in recent times it is becoming a bit more common.   I wouldn't bet on it.  Even if your plan is to flip the property, we would strongly recommend that you have the funds to complete the purchase.

Investment Risks
Bear in mind, your financial circumstances, economic conditions or even personal preferences may change while the property is being constructed. This is a risk you are bearing as an off-plan investor.

The unit may take any time between a few months to several years before the construction is completed.

Between the exchange of contracts and completion, you may or may not be required to make further payments, and the payment terms would have been clearly laid out in the contracts.

Further Payments
Some developers require further payments of 5% or 10% of purchase price a year after the exchange of contracts. Once the developer issues the notice of completion, you are legally obligated to see through completion.

If you are not able to complete for any reason, the developer may take legal actions against you. Please do all due diligence before you exchange contracts. A good solicitor will be able to advise you well.

What Happens If You Really Pull Out? 
Do not foolishly assume that you will only forfeit your 10% (or 20%) deposit.  If you do not complete, you have technically breached the contract and therefore the developer can sue you for damages.  The developer will surely win, in the event of such a lawsuit.

Is this fair?  Of course it is.  Think about it this way.  You put down 10% deposit for an off-plan property.  2 or 3 years later, if the property market tanks (e.g. prices drop by 30%), you may be better off walking away and not completing if all that you lose is 10%.  In such a scenario, when the market is bad and you did not complete, expect the developer to sue you and attempt to get the full price from you.

In reality, if the market has gone up, then it is likely that the developer will resell the unit quickly.  If successful, the developer can still sue you but the damages that the Court would award would likely be a lot less, because the actual damage suffered by the developer is much lower.  In fact, the developer could have made more money this way, if indeed he could sell at a higher price that what you had contracted with previously.

In all the advice we have read, you are strongly recommended to ensure that you have financing and you can complete on the property before you sign on the dotted line to exchange contracts.