Thousands of buy-to-let investors attempting to renege on contracts where property values have dropped below agreed off-plan sale prices face legal action from developers intent on holding them to the deal.

New-build flats, which were popular as buy-to-let investments, have suffered price falls of up to 40 per cent. Buyers, most of whom have paid cash deposits of 10 per cent, are now struggling to obtain financing to complete the deal.

"Many investors think that they can withdraw from a purchase for which they have exchanged contracts and simply sacrifice their deposit, but the legal position on this is quite clear," said Jeremy Raj, haed of residential property at Wedlake Bell, the law firm. "The buyers are legally obliged to complete on the transaction."

He said hundreds of property investors already had court judgements against them. Developers considering legal action against buyers include Grosvenor, for its flagship Liverpool One Complex, Ballymore for its Pan Peninsula in the London Docklands area, and Berkeley Homes for three developments in London.

"If a buyer chooses to pull out of the deal, they should expect to face the consequences of this action," said Jacqui Lloyd, partner at Brabners Chaffe Street, the law firm that is acting for Grosvenor. "Developers may have obligations or may have invested a great deal of their own money into a development."

Many buy-to-let investors who bought off-plan with the intention of selling the property on to someone else at a higher price have seen their plans scuppered in a weaker market.

Other buyers have simply been unable to obtain the financing to complete the purchase. A few years ago, banks and building societies were prepared to lend 90 per cent of a property's value. Now, the most many lenders will offer on new flats is 75 per cent.

Research out this week from Moneysupermarket.com showed the number of buy-to-let investors looking for a new mortgage had increased by 50 per cent in the past year. But the number of available buy-to-let mortgages has dropped by 70 per cent.

"With significantly fewer products left on the market and the high interest rates attached to those available, we could potentially have a ticking buy-to-let time bomb on our hands," said Hannah-Mercedes Skenfield at Moneysupermarket.com.

Published in the Financial Times, 5 September 2009