In my experience from speaking to clients, it is often only when a development delays or fails that buyers understand how their deposit was actually treated under the contract.
Buyers connected with the Kingsway Square development in Liverpool are in this situation. Contracts were exchanged and deposits were paid, but the development did not complete as anticipated. Sourced Development Group’s vehicle, Kingsway Square Limited, is now in administration
When this occurs, it is understandable to focus on the failure of the development itself. In many cases, however, the more immediate legal question is whether the buyer was properly advised by their conveyancer or solicitor before exchange took place about the risks within the contract, including how deposits and pre payments could be handled if completion did not take place.
We have addressed the circumstances in which buyers may have a claim in professional negligence.
In a previous article, we addressed the growing number of failed off-plan property schemes in England and Wales and examined in general terms the duties owed by solicitors in off-plan conveyancing transactions, including the obligation to identify and clearly explain material risks, the exclusion of standard contractual protections, the use of special purpose vehicle developers and the associated risks and the limitations of some security structures relied upon to reassure buyers.
This article is more specific and concentrates on the Kingsway Square development in Liverpool. It explains how the particular contractual structure used in that scheme affected the treatment of deposits, what buyers should look for in their own paperwork and how a lack of clear advice prior to exchange may give rise to a claim in professional negligence.
What buyers often assume about off plan deposits
Many buyers assume that money paid on exchange remains protected until completion.
That assumption is common because in most residential transactions, the deposit is held on a stakeholder basis.
In broad terms, holding the deposit on a stakeholder basis means the solicitor acts for both the seller and the buyer and the funds cannot be released to either party unless there is mutual agreement, or upon completion.
However, some off plan transactions depart from that model, such as Kingsway Square. Here, the deposit was instead held as agent.
Where a deposit is held as agent, the seller’s solicitor who holds the funds may pass the funds to the seller at any time after exchange (potentially immediately).
If the development then fails, which has happened here, a buyer may find that rescission does not automatically lead to a refund, because the money has already been passed to the seller and may have already been spent.
This is often the key difference between a situation where a deposit is recoverable and one where it is effectively lost.
Kingsway Square contract clauses and deposit risk
Buyers who are reviewing whether they were advised properly in relation to a development such as Kingsway Square should pay close attention to how the contract treats deposits and any additional pre payments.
Kingsway Square contracts that we have reviewed include provisions that depart from standard deposit protections. Some buyers who have approached us have raised concerns that these departures were not clearly explained to them by their solicitors prior to exchange.
Where a contract incorporates the Law Society Standard Conditions of Sale, but then disapplies specific conditions relating to how deposits are held, the buyer needs to be told clearly what that means in practice. Some buyers have indicated that this was not explained prior to exchange.
Further, where a deposit is held as agent and effectively treated as the seller’s money from the outset, even though completion may be a long way off, this needs to be clearly highlighted to the buyer before exchange. Unfortunately, it appears this may not have been the case for some buyers in this development.
A buyer may have contractual rights, including rescission, but if the money has been released and spent, they need to be informed that recovery may depend on the solvency of the seller or developer and the structure of any security arrangements. In that scenario, buyers can find themselves in the position of unsecured creditors, which is typically not what they expected when they paid a 20% – 30% deposit.
If money has been released as agent, it is even more important that the position regarding insurance is clearly explained. In the case of Kingsway Square, we have seen cases where buyers were informed that the seller had obtained insurance to protect the deposit. In fact, the contract expressly stated that the only obligation on the seller was to provide information so that the buyer’s conveyancer could themselves apply for a warranty. If the buyer’s conveyancer did not do so, then there was no protection for the deposit.
This is why the wording of the advice you were given matters. If you were not clearly warned that the contract treated the deposit as the seller’s money and had no protection, that is relevant when assessing whether the advice you received met the required standard.
How the deposit release mechanisms operated in practice
Some off plan contracts, such as those in the case of Kingsway Square, do not simply label deposits as being held as agent. They also set out a mechanism for releasing deposits and pre payments during the build. Buyers should look for language that requires the seller’s solicitors to transfer funds out of the client account upon request and for a wide range of purposes. Those purposes may include construction costs, but they may also include acquisition costs, professional fees, marketing and sales expenditure and the repayment of development borrowing.
If the funds can be drawn down for different purposes, the buyer may expect that the purpose of the funds be verified. In the Kingsway Square development, the contracts we have reviewed authorised the seller or developer to request payment from the solicitors upon receipt of a Schedule of Costs, invoice, account, fee note, or voucher. They did not require any form of certification by an independent party, nor impose conditions on how frequently or in what amounts such requests may be made. This allowed the developer to draw down the funds as soon as it produced its own internal paperwork, with no obligation to demonstrate genuine expenditure.
Furthermore, the contract removed any potential oversight by the seller’s solicitors. It expressly provided that the sellers’s solicitors were not required to review, verify, or enquire into the accuracy or authenticity of any Schedule of Costs or supporting documents before releasing the funds. This limited the role of the seller’s solicitors and meant that the release of funds occurred automatically on request.
When release categories are wide and verification obligations are limited, the buyer’s deposit and pre payments can operate in a manner that resembles development finance. Here, the buyers were exposed to the commercial risk that funds would be used up long before completion.
The contract also provided that all deposits and pre-payments received by the seller’s solicitors were irrevocably released to the seller and that the seller’s solicitors must send those funds to the seller or, at the seller’s direction, to the developer upon request. The buyer expressly acknowledged and agreed to this arrangement by entering into the contract. This meant that, once the contract had been entered into, the authority to release the funds could not be withdrawn. As a result, if buyers later became aware of the risks, they were unable to revoke that authority.
None of these items automatically means the contract is unenforceable. The issue is simpler and more practical. The question is whether the buyer was properly advised, in plain terms, that funds could be released early and what that meant if the development did not complete.
Buyers in this situation should ask themselves:
“Was I adequately informed as to how the deposit was treated under the contract and what would happen if the development failed?”
Security trustee arrangements and development finance priority
Kingsway Square documentation also refers to a security trustee structure. A trustee arrangement can, in some circumstances, provide protection and a route to recovery, but the details matters.
Buyers should check whether they have any direct enforcement rights or whether enforcement sits solely with a trustee, as was the case in this development.
Buyers should also be informed if the Trustee is associated with any other party to the contract.
It is also important to understand priority. If there is senior secured development lending, as in this development, lenders usually rank ahead of buyers. If buyer funds have been released and spent, the practical value of trustee security can be limited, particularly where recoveries are directed first to the main funder.
A measured way to think about this is that a trustee does not guarantee that deposits are ring fenced and, if the contract allows early release of funds and if senior secured lending ranks ahead, there may be little preserved value to protect buyers if the project fails.
This is a reminder that buyers should be advised as to the hierarchy and how any recovery would be obtained before they commit substantial funds.
When a claim against your solicitor or conveyancer may arise
Our review of whether you have a claim in professional negligence against your conveyancer will usually focus on the advice given before exchange.
A solicitor or conveyancer is not required to guarantee that an off plan development will complete. They are required to identify material risks and explain them clearly, so that the buyer is fully informed in relation to the agreement they are entering into before they commit to it.
In the Kingsway Square development, material risks included (but were not limited to) the following:
- The deposit is held “as agent” rather than stakeholder;
- The contract states the deposit or pre payments are “irrevocably released” and transferable out on request;
- There is a drawdown mechanism that allows early release of funds during the build;
- The permitted uses of funds are broad, including non construction categories;
- The purpose for the funds or documentation demonstrating the need for the funds did not need to be verified;
- The buyer has limited or indirect enforcement rights under any security structure.
If those features were present, a buyer may reasonably expect their conveyancer to draw attention to them to the forefront of the advice. They should explain the practical consequences and record this advice in writing.
Some buyers will still proceed, and that is their choice. In those circumstances, the conveyancer’s advice will not have caused the loss.
However many buyers, if properly advised, would have declined to proceed to exchange.
That is where causation often lies. The question is not whether the contract looked unattractive in hindsight. The question is whether the buyer would have acted differently if the risk had been properly explained at the time.
Group claims for off plan conveyancing negligence
A group claim approach to matters such as this is sensible where many buyers entered into materially similar contracts and suffered similar losses.
Where a number of buyers entered into materially similar contracts and encountered the same underlying issues, a group claim allows those shared issues to be examined for the group rather than repeatedly in separate cases. This can significantly improve proportionality, as legal costs that would otherwise be incurred individually can be spread across the group, making it more realistic to investigate and pursue claims that might be uneconomic on a standalone basis.
Individual circumstances still matter, particularly when assessing what advice was given and what a buyer would have done if properly advised. However, dealing with the common issues together can reduce duplication and allow us to focus attention on the issues that truly distinguish one claim from another.
There is also a practical benefit in proceeding alongside others who are facing the same situation. Litigation can be isolating and uncertain, particularly for individuals who have suffered significant financial loss. A group claim provides a degree of shared support and transparency, allowing buyers to understand how their position compares with others and how the overall strategy is developing. It does not remove the need for individual decisions or instructions, but it can make the process more manageable and less burdensome.
Our Experience
Elysium Law has represented hundreds of clients worldwide in actions of failed off-plan developments. Our experience and success rate in these claims is outstanding, with many multi-million pound recoveries for our client groups.
We continue to represent small and large groups of purchasers in multiple ongoing actions.
Due to our experience in these types of claims and our use of technology platforms for efficiency, we can offer competitive rates and recover the lost funds for our clients.
Who could benefit from our review
If you purchased an off plan unit at Kingsway Square, paid a deposit of 20%-30% and were not properly advised as to how your deposit was held and whether it was safe before exchange, you may benefit from our review of your circumstances.
Please contact us for a free initial assessment.
We will review your documentation, explain your options and confirm whether your case may be suitable for a group claim.
We will likely ask you to provide the following:
- A copy of your Purchase Agreement;
- Any correspondence with the developer, agent, or solicitor;
- Any legal advice you received;
- Evidence of payments made and whether any have been recovered.
Contact us today to have a discussion on how we can assist you.
