Claims for falling property values: A turn for the worse

I have been asked to advise on an issue that has not troubled developers or contractors for many years – the falling value of property being sold off plan.

The issue is this: a development for sale is due to complete by a particular date. Sometime before that date, the developer intended to market the development off plan. At that time, the property market was healthy and the developer believed all properties would be sold, if not off plan, then shortly after completion of the development. But delays occurred. The development could not be marketed or sold until later, by which time there were no buyers and the properties were being sold for significantly less than expected.

I have met developers wanting to know if they can recover this loss from the contractor, namely the difference in sale price as a result of late completion. Similarly, contractors want to know if they are liable to the developer for losses caused by the downturn in the market. The answer is an unsatisfactory “maybe”.

There is little legal authority on this point. The cases of negligent surveyor valuations from the nineties are not particularly helpful because those cases concerned property being purchased rather than sold. In those cases, the claims concerned losses that the purchasers or lenders would have suffered in any event by reason of the falling market.

One such case was South Australia Asset Management Corporation vs York Montague in 1997, in which the House of Lords decided that the damages recoverable in respect of a negligent valuation in a falling market were limited to the difference between the actual value of the lender’s security and the value of such security had the valuation not been negligent. In other words, the losses that were recoverable did not take into account the further loss suffered because of the subsequent fall in the market.

The present issue is different. Without the late completion (for which the developer blames the contractor), the developer intended to have sold the properties before the market fell rather than having to try to do so during a falling market. As such, the loss suffered because of the falling market is a loss that would not have been suffered in any event, rather only as a result of the developer being unable to sell the development before the market fell.

As this loss is dependent on the actions of independent third parties – the prospective purchasers of the development – the claim is, in my view, properly characterised as a loss of chance claim; in other words, by reason of the delayed completion of the development, the developer has lost the chance of selling the development at a time when property prices were higher.

What were the chances of the development being sold completely before the market turned?

The developer must show that it had a real or substantial chance (as opposed to a merely speculative one) of selling the development at the earlier time: see Allied Maples Group vs Simmons & Simmons (1995).

Resolution of claims such as these will require expert evidence as to whether there was a real or substantial chance the development would have sold before the market turned. If the developer cannot convince the court that it would have sold before that point, it is unlikely to recover any market-related losses. However, assuming that such evidence is favourable, how is such a loss quantified?

In percentage terms, “What were the chances of the development being sold completely before the market turned?” If the evidence is such that the court concludes there was a 90% chance, the damages awarded are likely to be 90% of the best price that could reasonably have been obtained for the development at the intended date for completion.

The developer who succeeds in a claim of this type must give credit for any sums received from purchasers, as well as the current market value of unsold units. These amounts would be deducted from any damages awarded to a developer. If this were not done, the developer would receive a “windfall” and be far better off than it ever would have been.

Many developments are aimed at buyers who will be affected by the credit crunch and tightening of mortgage lending criteria. As this continues, there are likely to be more developers with unsold properties on their hands looking for someone to blame.