What happens when a developer goes bust?

Matthew Griffiths

May 9th, 2022
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Few barometers reflect the health of the UK’s economy more accurately than the construction industry. It’s a finger on the pulse of the world’s sixth-largest economy.

And so it should. Construction sits in a bronze position as a contributor to the UK’s GDP, behind services and production.

An election, a change of interest rates, a financial crisis, the threat of war or a global health pandemic can all contribute to a downturn. But confidence, or perceived confidence, plays a significant role, too.

Confidence comes in the shape of financial markets, investors, business decisions, and Joe Public’s confidence to spend their cash.

Events like the financial crisis of 2007 and the lockdowns caused by Coronavirus were more than confidence issues, however. One starved the world of money whilst the other starved the world of a workforce.

And it’s not always that seeing is believing.

Speak to those in the construction supply chain, and despite the appearance that construction sites continue at full throttle, they can have a different story as orders slow and stock accumulates.

But what happens when these issues come together and it’s too much for a developer to continue trading?

Why do developers go bust?

Just like the factors that influence the economy, there are numerous reasons why a developer could go bust in both a negative and positive way.

  • Sales – if the worst happens and sales dry up, there’s no cash coming through the doors. This can affect how a business operates on a day to day basis. If the firm doesn’t have the required funds in the bank to see it through a slowdown period, it may need to borrow to keep trading.
  • Cash Flow and Debts – cash flow will be severely impacted in the case of the sales drying up. Bills will still need to be paid, operational running costs continue, and staffing overheads, but if no money is paid into the business, it’s likely to become insolvent, i.e. it runs out of cash.
  • Debts – companies will borrow for various reasons—expansion, land investment, or cover a period of reduced sales. However, servicing those debts can also become too much and the firm defaults on its loans.
  • Land – the cost of land in the UK is high. An overpayment of the land price or a lack of payment structuring can cause issues. Too high a price will mean that the end product will need to sell for more money and risks being too expensive. A full land payment upfront may cause cash flow issues down the line.
  • Banking – If a bank has a change of ethos or reevaluates its risk appetite, it may withdraw overdraft facilities, adding pressure on the available funds.
  • Infrastructure – the best due diligence in the world sometimes is not enough. Unforeseen costs can arise during the build process, and the most significant risk is in the ground: unknown services, poor ground conditions, over-engineered and expensive land solutions.
  • Bad management – More often than not, human error at best and greed at worst brings a company to its knees. Making the wrong financial forecasts or decisions or taking too much money out of the firm are surefire ways for a business not to be around much longer.
  • Supply chain – if your budget is based on supply by a particular materials provider, labour supplier or sub-contractor, and they withdraw their services or get themselves into financial issues, then this could cause severe problems, either financially as the replacement you find is more expensive or through delays, leading to your business missing deadlines and incurring penalties.

What happens when a developer goes bust?

There are a few avenues that a struggling business can take. For example, it could be sold as a whole, broken up and sold in parts, find itself in administration or even liquidation.

If the business is sold, the new owners will decide how they wish to run it and what to do with the current sites. The sites will be assets they are likely to want to realise by building or selling them.

Sold off as parts could be site by site; construction will likely continue.

It’s not guaranteed that the new landowners will keep the developments and may look to redesign the sites to suit their portfolio or be more profitable.

If a developer becomes insolvent, the business can be put under the control of Licensed Insolvency Practitioners or administrators.

They will aim to save the business and ensure that accrued debts are repaid.

Depending on the main creditor, usually a bank or an investor, they can appoint a receiver as they may decide to be built out the site to maximise their return and clear the investment owed.

In this case, the receiver will take over the project, either themselves or by appointing a team.

What happens to my deposit if a developer goes bust?

That depends.

If the developer has contracted with a housing warranty provider, they usually have a deposit guarantee pledge and will a purchaser’s refund deposits.

Therefore, it’s best to buy a new build based on a reputable warranty provider such as NHBC, LABC, Build-Zone, BLP and the like, being in place.

What about my house warranty and defects

A reputable housing warranty provider will offer between 10 and 12 years of cover.

However, the first two years should be covered by the builder/developer. Therefore, due diligence is required to check with the administrators responsible for this defects period and what contracts are in place. They should also pick up the first 12-24 months of snagging.

From year three onwards, the warranty provider will be responsible for, but not limited to, defects and issues with foundations and structure.

Summary

A developer going out of business doesn’t mean it’s the end of a construction site. It also doesn’t mean that it’s the last time you’ll see the deposit you put down, subject to a satisfactory warranty provider in place.

It is, however, likely to mean that there will be delays in the build process; weeks, months or possibly years. But, of course, any delays will depend on how smoothly the developer in question can be rescued or sold.

Finally, buyers will then be dealing with professionals such as administrators who won’t always think or operate as a developer. Instead, their main priority will be the creditors they act on behalf of and are their paymasters, which can be frustrating for purchasers.

Photo by Craig Whitehead on Unsplash

About Matthew Griffiths

Matthew takes great pleasure in combining his two professions. One has seen him give two decades of service to the construction industry, from roles as an Estimator through to sitting on Boards. The second is his passion for the written word. He now has the best of both worlds, building homes and constructing written content.

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