Checks needed before you put down deposit on a new home
I am a first-time buyer looking to purchase a new house from a West Yorkshire-based developer. The development I am interested in has only recently opened and the first phase of properties has just ben released for sale. Building has only just commenced.
I am cautious about paying a deposit at this early stage but the developer will only agree to reserve the plot if I pay a reservation fee of £1,000. I am taking out an 85 per cent mortgage to fund the purchase.
What security do I have in respect of my deposit which, as a first-time buyer, I cannot afford to lose?
As the houses on the development are not yet build complete and ready for occupation to secure the plot at this early stages means you are “buying off plan”. This is quite common as most developers wish to secure sales of the plots at an early stage to ensure quick payment once the house is finished. This is usually a cash flow requirement of the bank who hold the loan over the title to the land and are part funding the development.
Following payment of a reservation deposit, the sum of £1,000.00 is standard, the conveyancer for the developer will issue your conveyancer the contract. The documentation will include title documents, planning permissions and agreements with the council in respect of Section 106 requirements, road and sewer and a general information leaflet in respect of the development.
A Section 106 Agreement forms part of the planning criteria covering the development and details the terms and conditions set by the council to be adhered to by the developer in respect of the provision of affordable housing, contribution towards local road and recreational schemes and similar. All new developments are granted planning permission on this basis.
The construction of the development and compliance with Section 106 requirements is the financial burden of the developer. It is fundamental to ensure there are the necessary financial arrangements in place should for any reason the developer cease to trade before completion of the development and associated works. The present recession increases this possibility.
Your conveyancer will, as part of their responsibilities to you and your mortgage lender, check the following :
The payments due under the Section 106 Agreement have been made to the council.
There is a financial bond in place in respect of the completion of the roadways serving the development to the Highways’ requirements.
The property has the benefit of an acceptable building warranty such as National House Building Council (NHBC) or a Premier Guarantee – this warranty will also protect your 10 per cent deposit paid on exchange of contracts if the developer ceases to trade before legal completion.
Obtain an Undertaking from the developer’s solicitors to secure the release of the plot from the mortgage held over the title to the development.
Until the house is signed off by the local authority in respect of the Building Regulation Completion Certificate and the building warranty cover note is in place, your conveyancer will not be able to draw down your mortgage loan to complete your purchase. It would be prudent to ask your conveyancer to check how many of the other plots are under an exchange of contracts. The more there are the stronger the financial position of the developer. There is always a risk the developer could cease to trade. However, provided your conveyancer has carried out the necessary checks, your deposit will not be at risk. Check if the developer subscribes to the Consumer Code for Home Builders, www. consumercodeforhomebuilders. com
John Robson is residential conveyancing manager at Ford & Warren Leeds.