Most of you either currently work on residential based projects or will have had some involvement at some point. You cannot miss the advertisements by providers of guarantees or warranties on residential development sites. You may even have been required to provide a professional consultant’s certificate.
To provide a more detailed insight into the role of such guarantees, I have sought advice from my residential development colleague, Debra Heaton at George Davies, and have set out her main comments below. Read on for some background information and top tips.
Most buyers needing mortgage finance to complete a residential purchase will find themselves subject to the provisions of the voluntary code set out in the Council of Mortgage Lenders’ (CML) Handbook. More than 160 major high street banks and lenders belong to the CML and its Handbook sets out standard instructions which are to be actioned by the buyer’s professional advisors. The instructions cover a diverse spectrum of subjects, ranging from identification of the borrower to detailed provisions relating to the contents of leasehold flat leases. While the residential buyer may focus on the size of the garden or the kitchen units at his new property, the professional advisor needs to keep a careful look out to ensure the Handbook is fully complied with as any unauthorised departure from it can mean that finance may be refused.
The CML Handbook currently recognises a number of different professional warranties; also know as guarantees, for new build properties. The most familiar and probably most widely used is the National House Building Council (NHBC) Buildmark scheme. Indeed, the NHBC, originally set up in 1965, believes that it has captured more than 80% of the new build market. Buildmark offers a guarantee to the buyer that the property will be built in accordance with NHBC requirements with cover extending for a maximum of 10 years, backed up by insurance. The property is inspected at various stages by the NHBC inspectors who issue the Buildmark certificate.
The process
In the first two years, the buyer is covered for all defects by the builder who must put the problem right. In the subsequent eight years, the NHBC can be asked to step in to deal with structural problems. Extended cover is also available where the NHBC is used for building control. The buyer’s solicitor will check that the developer or builder is properly registered with NHBC, and also that the building contract does not require the buyer to complete the purchase before receiving a Buildmark Cover Note, which confirms to the buyer that the property has been built to NHBC standards.
NHBC is by no means the only provider of building guarantees. Zurich Municipal has been a player in the market for some time now and more recently there has been the emergence of Premier Guarantee underwritten by Liberty Insurances. Most recently, Building LifePlans underwritten by Allianz Global Risks have been approved by the CML as new home warranty providers. The cover offered is similar to Zurich and NHBC, but also includes a warranty period of 12 years, and they aim to attract builders with no registration and limited start up fees. They also have enhanced cover for non-structural component failure. Other providers do exist, but are not acceptable to CML requirements across the board.
Separate warranties for housing associations are covered under Housing Association Property Mutual which give more extensive cover, but generally for specialist developments.
Professional consultant’s certificate
By contrast, the professional consultant’s certificate is completely different in character. To comply with the CML handbook, the professional must be properly qualified in one of the major professional construction organisations, such as the Royal Institution of Chartered Surveyors, or the Institute of Structural Engineers, and must carry professional indemnity insurance for a minimum of either the value of the property or £500,000 whichever is the greater (or £250,000 where the consultant is employed directly by the borrower).
The important distinction from other warranties is that it confirms that the consultant has inspected the property throughout and therefore the consultant owes a duty of care to the buyer and his lender. But, it is up to the buyer to establish that any defect which arises at a later date is present as a result of the consultant’s negligence, and if he cannot, then the buyer will have no recourse against the consultant or his professional indemnity insurance. The certificate therefore does not provide insurance in the same way as NHBC or similar warranties. Furthermore, such certificates only cover a period of up to six years after the original construction (albeit freely assignable within that period), which is considerably less than the period offered by other guarantees. While a certificate which complies with CML requirements will allow the buyer to proceed, some buyers may be concerned about the reduced protection offered by the certificate.
The CML guidelines can be varied by individual lending institutions, and indeed, not all subscribe to the basic permitted warranties. While the vast majority will accept Zurich, NHBC, and professional certificates, some do not accept Premier Guarantee and a significant number do not yet accept Building LifePlan although the situation may change if these products gain a greater market share. Clearly this has an impact for both the first buyer who wishes to ensure he can buy the new property with his chosen lender, and also on re-sale.
It is always possible to approach the lender if a particular development does not reach the usual standard criteria for warranties, but legal advisors will be very cautious about the merits of doing this as it may not always produce the right long term result. In a recent incident concerning a consultant’s certificate which only permitted one assignment of a flat (rather than the free assignability required by CML); the issue was raised with the original lender who had taken a view on the matter on the original purchase. The buyer proceeded, knowing the limitations of the certificate, but taking his own view on the situation. However, when the flat came up for sale only 12 months later, the lender for the new buyer was less amenable. The main argument was that the first lender was always assured of being able to hand on the benefit of the certificate to a buyer if the lender had to take possession. The second lender was not in so happy a position. In this case, happily, the consultant was persuaded to amend the certificate, but otherwise, the original buyer may have been left with a perfectly good property which could have become un-mortgageable unless he paid a significant amount to get a retrospective alternative warranty. A salutary case indeed.
For the same reason developers and builders need to give consideration to the type of warranty which will be offered and keep a watch out for changes in the CML requirements, if they are to ensure that their new properties remain mortgageable and most importantly, marketable.
If you have any concerns regarding the warranties, please contact Debra Heaton at debraheaton@georgedavies.co.uk or Catherine Kay at catherinekay@georgedavies.co.uk.
Disclaimer
The content of this article does not constitute legal advice. You should always consult a suitably qualified lawyer for professional advice about any specific legal matter of concern to you. George Davies Solicitors, its partners and staff do not assume any responsibility for information contained within this article and disclaim all liability relating to such information.
About George Davies Solicitors
George Davies was highly rated, in the North West, in nine different categories of the 2005 Legal 500 review and in Chambers and Partners UK Directory. They specialise in all aspects of commercial law and boast a substantial Property Department within which sits a niche Construction team with experience in a full spectrum of construction law services. The firm was commended in the Legal 500 for their strong movements forward in a variety of property and construction deals and Chambers specifically mention its achievements in Construction. The Head of Construction, Catherine Kay can be contacted on 0161 234 8861 or emailed at catherinekay@georgedavies.co.uk