Buyer protection in off-plan condo projects
Delayed and non-performing condominium developments
Thailand’s condominium market is one of the main drivers of foreign investments in the Land of Smile. The advantage of an easy access to legal ownership enables condominium developers to bring to market even risky sales opportunities in the form of a pre-construction or off-plan condo sale. This means the contracts are concluded and partly prepaid before the Condominium Chanote (Or Chor 2) has been issued by the Ministry of Interior. When money changes hands, the construction work has not been started yet or at least not been fully completed.
Even when a condominium development seems to have a high pre-sale rate, this might depend on real estate investors playing the “presale & flip” game without having the funds to pay the acquired condominium units. When the pre-sale investment is not followed by a re-sale opportunity before the development is accomplished, the whole financial structure might collapse over night in a domino effect.
When selling computer-animated dreams instead of bricks and mortar, buyers (should) benefit from a huge discount (between 20 and 40%) which reflects the financial risk of a prepayment before the unit has been accomplished, the risk that the building quality is below expectations and the uncertainty whether the development will meet the scheduled completion date.
It is rather usual to finance the property development by prepayments made by off-plan buyers. Even if the condo project is announced as “fully bank funded” the bank loans have their payout conditions which might never be met. The reason for a non-performing condominium development vary but can be typically categorized into seven base cases:
- The developer used prepayments by the condo buyers to meet more pressing obligations for his other developments.
- The developer is for other reasons in a financial crisis, whether self-inflicted or not.
- The presale rate of the development is below the expectation and budget, and, as a result, the financing conditions of the banks are not met or the developer decides to sit the slow period out and to wait for a more attractive business climate.
- The property development faces unexpected legal hurdles and disputes regarding construction permission, environmental impact assessment or other legal issues.
- There are unexpected issues on the site, for example, low soil stability or water ingress.
- The time schedule has been prepared from the beginning as over-ambitious and unrealistic.
The percentage of delayed or abandoned condominium projects is not published. Newspapers and Internet forums are not interested in publications which shy the developer away from placing advertisements. And no one wants to harm Thailand’s property markets by focussing on defaulted investments. The disappointed buyer might feel pretty alone.
Condo developments are nowadays frequently branded by big hotel chains. In addition, they might be promoted through celebrities, beauty queens, and superstars. However, that does not mean that they provide any third party protection. The famous trademark bases typically on a license agreement and the condo management agreement with the hotel company will not come into place before the condo development is successfully accomplished.
Scope of actions on the buyer’s side
If the individual buyer receives a delay letter from the developer, reads about delays in the local press or simply experiences that the construction works do not follow the time-schedule, this should be seen as a clear warning signal that the full investment amount might be at risk. Calmness and generosity don’t pay and are the very wrong approach. Instead, a four steps examination has to take place:
- The reason for the delay as listed above has to be independently verified. It is obvious that the developer will always mention the reasons which scare the buyer least.
- The legal position of the buyer has to be independently examined. It depends on (i) the purchase contract, reservation agreement, and supporting documents, (ii) on the marketing material, and (iii) on the Condominium Act, the Consumer Protection Act, and other legislation and regulations. Deviations of the condo purchase agreement from the ministerial standard form (Aor Chor 22) and their legal implications have to be carefully reviewed.
- The status quo of the development has to be examined. This covers (i) the legal ownership of the land, (ii) the building material and regarding other relevant assets, (iii) the liens, mortgages and other financial implications, and (iv) the corporate structure of the developer.
- An evaluation and economic assessment of recoverable assets and liability mass to be the subject of an enforcement is essential to decide what to do.
Based on the findings of such due diligence, it has to be decided which strategic goal the buyer intends to achieve. When legal ownership in the unit is not yet created it makes no sense to request the condominium title deed. Instead, the buyer might request
- The swift performance of the construction works,
- A full refund of his deposit plus interest,
- Compensation payments for his losses,
- The securitization of his claims by mortgages, bank guarantees and, for example, shares, or
- An initiation of criminal investigations.
There is no general advantage to start pre-litigation or litigation by the buyer alone, as a group, or even as legal proceedings under the class-action scheme. A lawsuit might be too weak and cost-intensive for an individual. A big group of plaintiffs might be impossible to be efficiently managed and only a quick and selective procedure might be enforceable. It is a proven strategy to start with just a few buyers and to accept joint parties if they agree on a predefined course of action.
Smart approach in a challenging environment
Thailand’s property developers have a significant market power, especially for the legal industry. They use their traditional influence and power to affect also local law firms which represent the buyer.
PUGNATORIUS Ltd. assists foreigners in the acquisition and disposal of condominium units and condominium developers in the corporate structuring and contract designing as well as in the overall tax planning of the condominium development. Protect your condo in paradise. More about Thailand’s condominium markets and legal aspects at pugnatorius.com/category/condominium