Estate agents sell properties. They are not as a rule there to carry out extensive due diligence. They should therefore also not be expected to carry out searches on resale properties that they have on their books. In theory they shouldn’t need to carry out any due diligence on a development before agreeing to sell properties there either but we have seen over the years more and more foreign developers have problems with their projects and naturally this has had profound knock on consequences to the reputation of agents.
Imagine the situation where you are an estate agent or an IFA (Independent Financial Adviser) and agree to sell properties at a particular development abroad. The developer who is building is doing so illegally or the whole thing is a scam. You encourage your clients to buy properties and then the problems start. Your clients naturally ask you why you sold properties at that development and what due diligence you carried out on the project before you agreed to start selling those properties. Your reputation is thereby adversely – and in some instances – legally affected by the actions of the developer.
So, what due diligence should you be carrying out as an estate agent or IFA before agreeing to sell properties on behalf of a developer? Whilst not a legal basis upon which you should rely, here are some basic guidelines which should demonstrate clear evidence of your Due Diligence should any future event emerge.
Ownership
Does the developer own the land on which they are developing or intending to develop the property or do they simply have an option over that land? Ask for clear evidence such as Title Deeds or certification of ownership.
Charges on the land /property
Are there any charges on the property or land? It is not unusual for developers to have some sort of initial or existing mortgage on the land. If there is an existing charge this isn’t necessarily a problem as long as you have knowledge of such charges in advance of your purchase.
Finance
How is the development financed? Is the project and construction being funded solely from sales and the deposits being paid by investors or some other form of finance? Will the developer be able to finish the project with self-funding if the sales don’t materialise or does he have to rely on sales to build the properties?
Planning permission and building licenses
Does the development have planning permission and / or the relevant building licenses? If the property has planning permission is this full or outline planning permission? Are there any restrictions on this or any time limits on them? Again, ask for clear documental evidence of licenses.
Long term plans
What are the long term plans for the development? Are there going to be further phases or other projects that could affect the development?
What else is being built in the area?
Other projects in the area, either by the same developer or different developers can have an influence on the desirability of the development that you are intending to sell – either positively or negatively. Have you done your research into what else is going on in the area?
Construction guarantees
What guarantees are in place for construction to make sure that the project is finished or that the buyers can get their money back if the development does not complete. Are there any bank guarantees like the ones required under Spanish Law? Is there an insurance policy? Is there an Escrow arrangement of some sort? Is the property put into Trust in some way?
What is the exact structure of the various companies?
Are you clear about the exact structure of the various companies involved, what they do and how everything fits in? Are you clear as to who you are contracting with and how this differs from who may actually own the property and who is constructing the property (if at all). Think about what happens if it all goes wrong and what you and your client’s options are. Depending on the structure you and your clients may have a claim against one company but all the assets may be in another company.
Is the company regulated?
Is the developer regulated and registered with any bodies that they need to be? Are they members of bodies such as the Association of International Property Professionals (AIPP – www.aipp.org.uk)
What is your contract with the developer like?
Is your contract with the developer in order? Are the clauses clear in relation to, amongst other things what rate of commission is payable, when it is payable, what your obligations are and what their obligations are?
Purchaser contracts
Do the purchase contracts that the developer will be expecting your clients to be signing seem to be in order? Are they negotiable or will they be fixed? Will they be acceptable to potential purchasers?
Guaranteed rentals and guaranteed capital gains.
Many developers promise guaranteed rentals and sometimes guaranteed capital gains. If they do – who is behind these guaranteed rentals and do they have any substance behind them?
Their past history
Look into the past history of the developer. We often see developers of overseas properties fail in one country and then simply move to another country and try again but make the same mistakes over and over again. What other developments have they done in the past - did those complete on time and if so what is the quality of those developments like? If other developments were delivered late or not at all and the quality is questionable and there were problems during construction the likelihood is that similar problems will re-occur with other developments that the developer tries.
Training on products
Will the developer provide training to you and your sales staff on the products that they are expecting you to sell? If so who pays for the costs associated with this?
Promotional materials
Will the developer be producing marketing materials or will you be expected to produce these? What is provided and who pays for promotional materials. If you are provided with promotional materials who is responsible if the information turns out to be inaccurate?
Local attractions
If future local attractions such as airports, golf courses or theme parks are a major selling point then what is the status of this. Is this just a rumour or will it be built? Ask for clear evidence of any attractions which are being used as a sales tool within the promotional materials.
Whilst not extensive or comprehensive, all of the above should be forming the basis upon which you agree to become an agent for an overseas property developer.
If you are an estate agent (or even an IFA) and have been approached by an overseas property developer or are thinking about selling overseas properties and wish to carry out your own independent due diligence on the products before entering into such an agreement - and would like to speak to a UK based specialist international property solicitor = then you can contact our legal team.
You can read more about Judicare and the services we provide in our corporate brochure.
Disclaimer – International legal issues are a complex area of law and this information is no substitute for independent legal advice on an individual basis taking into consideration your personal circumstances and legal requirements. This information is provided to provide general information only and was correct at the time of publishing. The legal position in relation to international transactions can change frequently and this page may not have been updated following any changes in the law. You should therefore not rely on this information and should seek legal advice in relation to your personal circumstances.