Property developers find many innovative ways to fund developments. A not uncommon method is to enable the use of initial purchaser's deposits to cover early phase work, with a commercial lender providing development funding once an agreed percent of sales has been secured and the development is fully costed. The use of a deposit paid to the seller's solicitors as agent and released on exchange of contract in this way is obviously a significant risk to a purchaser, but can be mitigated by insurance/with the issue of a performance bond.
Such a scheme was proposed to a large number of individual overseas investors who each entered into agreements for the lease of an apartment within a student accommodation block to be constructed by a developer, Alpha Students (Nottingham) Limited. Each purchaser paid a 50% deposit on exchange of contracts, and agreed to its release to the developer; the repayment obligation, should notice of non-completion be issued by the developer, being backed by an insurance policy.
A number of unforeseen problems emerged, third party commercial funding was not obtained and the development did not proceed. Furthermore, by the time the developer gave notice to the purchasers that they would be unable to complete, a large proportion of the £3.5m deposit had been utilised and, disastrously for the purchasers, the insurance company who had provided each purchaser with cover, had itself entered into liquidation and was unable to meet claims. The collapse of the scheme caused the insolvency of the developer company and its liquidation.