With so much going on in the Sydney residential property market, we've seen many developers stretch their resources beyond a comfortable capacity. We recently worked with a developer that was in the process of building 20 apartments in a prime, lower North Shore location in Sydney. All of the apartments were sold off the plan.
With the project running over two years late, the developer was in financial distress. There were many reasons for the delay including: design issues, problems with work quality, cash flow issues, and disputes with the builder.
Fearful that their investment was at risk, the project's financier was threatening to appoint Receivers and Managers to complete the project and rescind all pre-sales.
- The developer and financier were facing a significant increase in costs to complete the project's construction and obtain an occupation certificate.
- Assuming they wanted to continue with the sale, purchasers of the units would need to pay a higher contract price than was originally agreed.
- An incentive fee would need to be paid to those purchasers who decided not to proceed with the purchase. The developer would then need to kick-off a new sales program to find new purchasers.
As the value of the apartments had increased significantly since purchasers had signed their contracts, they were very keen to proceed with their respective purchases. A number of the purchasers were involved in the building industry themselves. When it was clear that the project was in trouble, purchasers attempted to negotiate with the developer/builder directly.
However, once the Hong Kong-based, hedge-fund financier stepped in and threatened to cancel all contracts, a different strategy was needed. BRI Ferrier was then enlisted to advise the purchasers on their options and help move the project forward. With pressure from the financier, the timing was crucial.
We assisted in organising meetings with all purchasers and the financier to explain the available options (including the shortcomings in their respective positions) and the process through which an acceptable outcome might be achieved. The approach was to find an innovative resolution to enable the delivery of the project. Our goal was to:
- Minimise any contract price increase for those who wanted to proceed with purchasing their apartment.
- Maximise the ''incentive' fee payable to those who wanted to rescind their contract. Though this payment was not mandatory, it helped to smooth the process.
- Finalise the project for benefit of the purchasers and the financier.
- Following our intervention, the project was completed to the satisfaction of the purchasers and the financier.
- The units were handed over to purchasers who wished to proceed with payment of 15% increase in the contract price.
- Where the purchases chose not to go ahead with the purchase of a unit, their deposit was returned and an incentive fee of $150,000 was paid by the financier as compensation for the contract rescindment.
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