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.

Landlords Purchasing - Getting Documents Ready

Getting Documents Ready For Your Purchase

Your lawyers will guide you through the documentation required for the purchase of a London property. 

Cash purchases are simple. You will only need to provide some identity documents, proof of address using a utility bill or bank statement, as well as proof of funds for the purchase. The money laundering rules in UK are very strict.  You have prove that you own the funds, usually by way of bank statements showing that you have accumulated the funds over time. Some lawyers will require statements over the preceding three months. Some lawyers or developers will require that the identity documents are certified by a lawyer, bank or notary. There may be a minor cost incurred for the certification.

Cash purchases are not uncommon, so we heard.  

Loans with Singapore Bank

Total Debt Servicing Ratio (TDSR) rules will apply.  This is the MAS regulation and the banks have zero flexibility on this.  The paperwork isn’t any more difficult than taking a loan for a Singapore property. With the TDSR rules in place, you will have to gather your pay slips, IRAS income statement, credit card statements, and all documents relating to all financial you are currently servicing. We have however found Singapore banks extremely efficient in processing loan applications. Foreign banks (we have one loan with Lloyds) generally take a longer time to process.

Property Completion Period - Can Be Stressful! 

The property completion period is usually the most eventful period as far as paperwork goes. Once notice of completion is served by the developers, you usually have 10 working days to complete. 

Some law firms try to get all the paperwork (such as stamp duty form, legal charge, proof of funds etc) done way in advance, to minimize the hassle during the completion period. Other law firms operate on a different work cycle and leave it till the completion period to carry out all the work at one shot. If you are taking a loan, the legal charge must be signed before the bank will disburse funds. Your law firm will receive the lease when notice of completion is issued; the lease will be couriered over to you for your signature, and you must courier it back to the lawyers for completion.

On the day of completion, the signed lease, together with the completion monies (from you and/or your bank) will be handed over to the developer’s solicitors, and the keys will be released.

The notice of completion given by developers is 10 working days, which is 2 weeks. You will be liable for late completion charges if you are not able to complete on time. So far, we have not run into late completions. The banks and legal firms we have worked with have acted swiftly and have not delayed completion.   

Phew!