Guidance on new home contracts impacted by COVID-19

The Cabinet Office issued guidance on the performance and enforcement of contracts impacted by the COVID-19 emergency on 7 May.

This guidance on new home contracts may have unwanted consequences for developers and new home sales.

Failure to complete has always been an issue that occurs from time to time and developers generally deal with it on a case by case basis. Frequently completion does occur, it is just delayed. Currently, and unsurprisingly, developers are finding that some new home buyers are failing to complete due to COVID-19 related issues, or are trying to use the current situation to withdraw from a contract.

Up until now developers have had the certainty of the contract provisions and the Standard Conditions of Sale, which regardless of the version typically provide for a deposit to be retained by the developer in the event of default by the buyer.

This position on new home contracts is now muddied. Clause 14 of the Cabinet Office guidance encourages a reasonable and proportionate response in dealing with performance issues “Acting in a spirit of co-operation” to reach a just and equitable contractual outcome having regard to the impact on the other party and the availability of financial resources. Clause 15 of the guidance sets out examples where in particular responsible and fair behaviour is encouraged. The examples include at 15(f) the returning of deposits or part payments.

The court has always had the ability under Section 49(2) of the Law of Property Act 1925 section 49(2) to require a seller to return part of a deposit where a buyer has failed to comply with a notice to complete:

S49(2) “Where the court refuses to grant specific performance of a contract, or in any action for the return of a deposit, the court may, if it thinks fit, order the repayment of any deposit.”

It is unclear whether some buyers will now seek to use the new guidance as a means to recover a deposit accepted in good faith by a developer, and how such an attempt would be viewed by the courts. But it is expected that in the current climate some buyers may try to withdraw from new home contracts.