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Clawback Clause Causes Concern

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'Clawback' clause causes concern

An unusual profit clawback clause requires high-value apartment buyers to give back to the developer profits they may accrue through resale of their property.



THE Office of the Director of Consumer Affairs is to investigate a complaint from the solicitors' Conveyance Committee of the Law Society about an unusual profit clawback clause on upmarket Dublin apartments.

The clawback was introduced by Dublin developer Radorra for the first tranche of apartments it is selling next to St Vincent's Hospital on the Merrion Road, Dublin on a site which was bought from the Sisters of Charity.

The clawback would result in purchasers paying back 100% of profits from selling on an apartment in year one and phased clawbacks down to 10% of the profits on a sale in year 10.

Kevin O'Higgins of the Dublin Solicitors Bar Association originally raised the clawback clause with the Conveyance Committee of the Law Society and through them with the Director of Consumer Affairs.


He believes that the clawback clause can be deemed an unfair term under consumer legislation. Such unfair terms can be can be outlawed when the courts considers it illegal to impose clauses on consumers who have little choice but to accept the terms.

Some years ago when a number of unfair terms were introduced into property contracts, the Law Society encouraged the Director of Consumer Affairs to bring a case to the courts and it resulted in the land mark judgement outlawing such terms.

However the profit clawback clause was not part of that case so there is no judicial decision of its legality. As well as the protection of the consumer the clawback may also pose a problem for banks and mortgage providers. When the home buyer cedes away a good chunk of the equity to a third party, then the banks may be concerned that such a condition would affect the potential equity in the property.

A spokesperson for Radorra confirmed that it has been in correspondence with the Director of Consumer Affairs on the issue. He explained that the clawback clause was based on similar terms used by Dublin City Council (DCC) in its contracts for sale of homes under the affordable housing scheme.

"As with the DCC scheme, the clawback is designed to deal with a situation where the purchasers will be acquiring the properties at a significant discount to the market value. It is an exceptional case arising because the initial booking deposits were taken over three years ago. In the meantime the properties have appreciated considerably in value., The sales will not be completed until the second half of 2007.

Asked if the clawback would apply to future sales at the development, the spokesperson pointed out that the contracts that had been issued were exceptional because of the three year time gap. Another unusual aspect of the deal was Radorra's request for a 25% plus deposit at the contract deposit stage. This is more than double the normal deposit of 10% which is due at this stage.

Under the Irish Home Builders Association Purchaser Protection Pledge, the normal deposit payable at the contract stage is 11% under stage payment style contracts.

The spokesperson for Radorra said that it is covered by the pledge and by Premier Guarantee. The latter's normal deposit cover is usually 10% of the purchase price.

Radorra's contract is not a stage payment contract.

However the time limit set by Radorra for the return of the contracts was only 10 days compared to the three weeks set out in the IHBA Pledge.

Furthermore the pledge states that "the contract shall be in the form of contract approved by the Law Society and the CIF and shall remain unamended except as to matters of title or other matters which are generally regarded within the legal profession as proper matters for amendment."

Radorra itself acknowledges that the clawback is exceptional and The Law Society's conveyance committee clearly does not consider it as a proper matter for amendment.

No complaints

A spokesperson for IHBA said that he had not seen the contract and had received no complaints about it.

Despite both the scale of the deposit and the clawback, the spokesperson for Radorra pointed out that all of the purchasers who paid the initial booking deposits had stayed in and accepted the terms of the contract. Despite Radorra arguing that the clawback precedent was set by DCC's affordable housing scheme, Mr O'Higgins says that this will not count in legal terms.

He believes that what the Government does is a different matter to the terms that apply in consumer law.

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