What should you do if you purchased off the plan and the developer becomes insolvent?

Buying a property off the plan can be an exciting way to secure a new home or investment. But what happens when the developer behind the project becomes insolvent?

For an off-the-plan purchaser, a developer’s insolvency can create a significant concern. Construction may stop, settlement may be delayed, and you may be left wondering what will happen to your deposit and whether you are still required to complete the purchase.

Insolvency does not automatically mean you have lost your property or your deposit. However, the steps you take early can make a significant difference.

Most importantly, don’t simply assume that your contract has ended because the developer is insolvent.

Here is what you should consider if your off-the-plan developer becomes insolvent.

1. Understand exactly what happened: Look for formal notices from the developer, administrator, liquidator, receiver, financier or other relevant parties. Keep copies of every letter, email and notice you receive.
2. Get your contract reviewed immediately: Have an experienced property solicitor review the contract
3. Find out who is controlling the developer: Once a developer becomes insolvent, control of the company may change.
4. Protect your position regarding the deposit: You need to understand where that money is held and what protections apply.
5. Don’t automatically stop complying with the contract: Until you have received appropriate legal advice, continue to monitor all contractual notices, deadlines and correspondence.
6. Understand what happens if the project is sold: One possible outcome is that the development or the developer’s assets are sold to another party.
7. Be careful before agreeing to variations: If a new developer, financier or insolvency practitioner asks you to sign a new document, variation or replacement contract, get independent legal advice before signing.
8. Consider your finance and valuation position: A lengthy insolvency process can create another problem: your financial circumstances may change while you wait.
9. Keep detailed records: If a dispute arises later, having a complete paper trail can be extremely valuable.
10. Don’t rely on what other purchasers are doing: Use information from other purchasers as a source of background information—not as a substitute for independent legal advice.
11. Understand the possible outcomes: The best outcome will depend on the project’s financial position, the value of the underlying land, construction status, finance arrangements, purchaser contracts and the decisions made by the insolvency practitioners and secured creditors.
12. What should you do right now?

• Obtain the formal insolvency documents and understand what process has commenced.
• Have your contract independently reviewed by an experienced property lawyer.
• Find out who has control of the developer and project.
• Determine what has happened to your deposit.
• Continue monitoring contractual deadlines and notices.
• Do not sign a variation, termination or replacement agreement without legal advice.
• Speak with your lender if the project is likely to be substantially delayed.
• Keep detailed records of all communications and documents.

An insolvent developer does not necessarily mean the end of your off-the-plan purchase. A project can sometimes be rescued, sold or completed under new ownership.

However, the situation can become complicated very quickly, particularly where large deposits, project finance, construction delays and competing creditor claims are involved.

The most important thing is not to make assumptions about your rights or obligations.

If you are an off-the-plan purchaser facing developer insolvency, contact PDC Law today to obtain independent legal advice to help you understand your options and protect your position.