The reversal of Caveat Emptor - Response to the Government's Call for Evidence on improving the home buying and selling process
The Government has recently issued a Call for Evidence on improving the home buying and selling process (http://bit.ly/2ifAsig). This should be viewed as a pretty significant move, especially when one reflects that, apart from a botched attempt in 2007 to make changes with the introduction of the home information pack, this country has not seen any major property legislation reform since 1925.
The question of whether there exists sufficient political will, and indeed strength, to bring about much needed change is debatable, and only time will tell if anything comes from this initiative. It marks a welcomed start however, and will at the very least, bring to the forefront some of the major deficiencies which exist within, what has become, a very archaic conveyancing system.
In this response to the Call for Evidence, I will outline my thoughts on what could be done to bring about an instant and simple change, and plans which would not take too much political effort and legislative time to implement. One thing is for sure, we will not be seeing, at least in my lifetime, far reaching and detailed changes. There is far too much vested interest, and without the full support of all stakeholders ( which was completely lacking in 2007 when HIPs were introduced ), even the strongest of Governments would find it difficult to find the courage to meddle too much. Indeed, this is acknowledged within the Call for Evidence where the Government on commenting on what happens in certain other countries, concludes:
‘The thoroughness of the current system for buying and selling homes in England and Wales is one of its great strengths and there is no desire to completely uproot it and replace it with something else’
So what are the issues with the current system?
The Government identifies mistrust and delay as the major issues. There is within the Call for Evidence multiple reference to ‘Guzumping’, and the frustration home sellers and buyers experience during the process. Mistrust and delay are clearly linked, and there is no doubt they present, when combined, a major problem for the consumer when embarking on the conveyancing journey.
On the subject of delay the Government provides us with this statistic:
‘Around 40 per cent of buyers and sellers felt that the exchange of contracts was delayed and where a delay occurred, they were likely to blame the conveyancer for the other party. When asked about how the home buying and selling service could be improved, around a third of buyers and sellers wanted a faster service from conveyancers’
This is of no surprise when you take into account the number of steps there are in the current process ( the Government highlights 70), the lack of immediate control over the role others play in the process, such as lenders, estate and management agents and Councils, and also the varying standards of the conveyancers operating within the system. I always say to clients when asked about the time it will take, that it will all depend on who is acting for the other parties in the chain, since I will only be able to go as fast as the slowest party permits.
As for ‘guzumping’ I am not sure this is a widespread issue. I believe clients are more concerned about seeing a joint commitment to progress with a transaction once an offer is accepted. Clearly as the system currently operates, either party to a transaction can pull out, without any financial penalty, right up to the point of exchange. This creates uncertainty, fear and an unwillingness to commit both financially and emotionally to a quick progression of the transaction. Why pay for searches and a survey too early in the process, when there is a fear the seller may withdraw and re-market.
So what is the proposed solution?
There is no instant or magic fix. As I say earlier, the only way of major improvement is to start with a clean piece of paper. However this will simply not happen, and the only hope the consumer has is that through some light touch regulation, a Government may be able to bring about some small changes which will make the conveyancing experience a little more certain and transparent.
I say regulation will be required, since without it, as the voluntary uptake of the Law Society Conveyancing Protocol, or rather lack of it, has shown, any hope of improvement will simply not materialise. The limited success of the Home Information Pack demonstrated that you need to mandate and impose requirements to bring about change, and to make sure it is implemented in a uniform and strict way.
Acknowledging as I do, that any change will need universal support from all stakeholders, and take a form which is not too out of alignment with the current process, my proposal ( which is not new), is that thought should be given to reversing the legal basis on which the sale of a property takes place. Currently this is based on the principle ‘caveat emptor’. This means that the buyer needs to make investigations about the property before exchanging contracts to purchase. Broadly this is on the basis that, subject to certain exceptions, the buyer will take the property subject to matters that he didn’t know about, if he failed to search or make enquiry.
This is a long established principle of law and some would argue that it is unlikely a Government would look to interfere with it. There is some strength in this view, although in recent times it does appear the Government has an appetite to challenge its application. Take for example, the Consumer Protection (Amendment) Regulations 2014, which, though not directly impacting on residential conveyancing, clearly demonstrates a will to impose an obligation on a ‘trader’ to be upfront and honest about everything. Interestingly the 2014 Regulations changed the definition of “trader” as contained in the Consumer Protection from Unfair Trading Regulations 2008 to include not only a person acting for the purposes of the person’s business but also someone “acting in the name or on behalf” such a party. A conveyancer will often act “on behalf” of a client in matters such as issuing replies to enquiries, so their action may directly affect the client, and could be captured by these regulations.
There seems to exist therefore a blue print for the imposition of a similar obligation on a seller in a residential property transaction.
So how would this work in practice?
The onus would be on the seller to provide the buyer with a full and honest disclosure of all known ‘bricks and mortar’ and legal issues relating to the property to be sold.
Borrowing the wording of the criminal offences created by the 2008 Regulations mentioned above, this could be implemented by imposing the following legal obligation on a seller:
- Not to provide false information or present information in a way which deceives or is likely to deceive the average consumer and, as a result, causes or is likely to cause the average consumer to take a transactional decision that they would not otherwise have taken.
- Not to omit or hide material information or provide material information in a manner which is unintelligible, ambiguous or untimely, or fails to identify its commercial intent and, as a result, causes or is likely to cause the average consumer to take a transactional decision that they would not otherwise have taken.
I am not advocating the creation of a criminal offence, but legislation could be introduced along these lines to provide the buyer with a right to rescind the contract/claim damages, if it could be shown that the seller had not complied with these obligations.
This would also supplement and enhance the already existing exceptions to the caveat emptor rule.
• Latent defects - technical defects in the quality of the legal title to a property that are not reasonably discoverable by looking at the paperwork or from inspecting the property, eg an undisclosed restrictive covenant. If they exist, their presence may allow the buyer to walk away from a transaction.
• Misrepresentation - incorrect replies to enquiries that cause damage to the buyer can lead to a claim. A misrepresentation is not only an out-and-out incorrect answer but also overly distorted answers deigned to mislead.
The change in emphasis would mean the seller would need to get his or her ducks all in line before embarking on the sale process by submitting a contract pack.
A prudent seller looking for certainty would probably have the property surveyed, to ensure the survey had recommendations if there were issues, and to be willing to make this available to the buyer.
Estate agents will probably argue this could turn potential buyers off. I am not sure I agree. If the report is structured in a positive way with constructive recommendations, it would make the property more appealing to the buyer, and would avoid the cost of a late withdrawal from the transaction, which happens pretty regularly. It would also assist a seller in securing an early mortgage offer, as I suspect the lender would need to see the survey as part of the application process. It would also lay a safer, and more secure, foundation for the introduction of a pre-exchange deposit requirement.
I would also envisage the existing Property Information Form becoming larger in its scope, and encompass questions on the legal title, probably requiring the seller to produce the Land Registry title documents, as well as including the disclosure of any apparent title defects, together with positive recommendations by the seller on how these could be addressed. For example, the offer of indemnity insurance.
I could also see the Property Information Form having to be supported by the three standard property searches - Environmental, Water and Drainage, Local Authority, together with recommendations on addressing issues which may arise from out of each of these search results.
The search industry might wish to use this an opportunity to design a new type of search which encompasses all of the important material contained in these separate searches, but which also includes nearby planning applications and flood data.
I agree this involves a lot of front loading. I also agree is smacks of the home information pack days. We shouldn’t however be too dismissive of that effort to quicken the process, and I am sure had the legislation had the full support of all of the stakeholders, and had become law with the survey requirement still intact, it may have very well survived.
The difference here is that the change would not be prescriptive. The onus on the seller and the sellers conveyancer would be to make sure the seller is complying with the disclosure rules and to be made aware of the consequences in the event of a failure to adhere. All the proposal would do is to shift the emphasis for investigation away from the buyer and onto the seller.
So what would the advantages be of this system?
To begin with, there would be less scope for delay once the transaction is commenced. The role of the buyer conveyancer would still be to check the disclosure and to report to the buyer, and the buyer’s lender. There may be several options for addressing disclosed defects, and the conveyancer will need to be able to advise the buyer on these. The role may change slightly. The buyer conveyancer may become more involved in price re-negotiation on the basis of the recommendations, and the risks to the buyer proceeding in the knowledge of the disclosed facts.
There would be less need to report issues to lenders, which often spring up late in the course of a transaction, and which nearly always lead to delay.
The disclosure would also rule out the lengthy and sometime stressful part of the conveyancing process where the buyer asks the seller countless questions and asks for documents mentioned in search results, which often cant be found or don’t exist. It would get around the inquisitorial and defensive approach to information that is actually readily available to the seller.
Secondly, the obligation to disclose will almost certainly promote greater trust between the seller and the buyer. The buyer is able to proceed knowing remedies would be available in the event of a failure to provide full and frank disclosure. The buyer would also be purchasing in a more transparent way, and this in itself would create more certainty over choice and lead to less abortive transactions.
Knowing more about the type of transaction at the outset will also make it easier for the conveyancer to quote for the work, and reduce the scope for fee increases during a transaction, when issues not known at the quote stage arise.
Collating data on a property at the outset, and exposing all of its weaknesses, and putting forward solutions to address the defects, could also lead to greater speed and less cost in future transactions , if a structure for recording the issues and resolutions for future reference is also implemented ( such as a property log book ), at the same time. It is madness that a legal title to a property is investigated time after time by different lawyers yet there is no record of what was found, and what action was taken to remedy defects. Surely a mechanism within the Land Registry could be devised to address this, and make it easier and quicker for registered property titles to be relied on.
Response to specific questions within the Call For Evidence
The Call for Evidence raises specific questions, and in the next part of this article I record my observations, and look to see how a reversal of the caveat emptor rule could address some of the concerns expressed.
Q1. Should the Estate Agency industry do more to make customers aware of how to complain? If so, how
Yes. As conveyancers we are expected to make our complaint process crystal clear in our letter of retainer, and to set out all of the stages, including the right to refer the complaint once internal avenues are exhausted, to the Ombudsman. Why should this be any different for an estate agent.
Q2. Should the government take further action to enforce current transparency regulations regarding disclosure of referral fees? If so, what action should be taken?
Yes. If there is a referral fee or a referral arrangement this should be made very clear so that the consumer knows from the start that part of the fee payable is going to the conveyancer. Self regulation on this would not work, so thought in my opinion should be given to a complete ban of referral fee arrangements.
The consumer often has to pay more for conveyancing due to the inclusion of a referral fee, and unless this either becomes far more transparent, such an arrangement should be made unlawful.
There is also a major question mark over whether referral arrangements serve the best interests of the consumer. How can one be entirely sure that the referral arrangement is not compromising the independence of the advice given by the referrer? In short, there is little evidence that referral arrangements actually benefit a consumer.
In the case of estate agents, referrals also take place between other professionals, such as mortgage brokers. The same observations apply to these arrangements.
Q3. What would the impact be of banning referral fees?
It would have no impact whatsoever. Look at what happened when referral fees were banned in the claims industry. All it will mean is that funds will be used for alternative marketing initiatives. Consumers do not need agents to be able access assistance from conveyancers.
Q4. Should the government introduce more regulation for estate agents? a. If so, what sort of regulation would be appropriate?
Yes, though it clear that regulation will only be effective if it is policed adequately. Take for example the Estate Agents (Provision of Information) Regulations 1991 that requires the agent to produce particulars of the circumstances in which the client is liable to pay fees, of the amount of the fees, and particulars of any other payments the client might have to make, for example advertising disbursements. There is plenty of information to suggest that these requirements are not being met.
As said above, there should be regulation brought into ban referral fees.
Q5. What should industry do to help consumers make more informed decisions when selecting a conveyancer? a. How could government help facilitate this?
The first step is to create greater transparency when it comes to presenting fees. Conveyancers display their fees differently, and there is a need to standardise the presentation of quotes. One conveyancer may, despite professional regulation to the contrary, look to hide profit in search fees/bank fees, whilst another is far more transparent and breaks those fees down. The difficulty this presents is that when comparing the fee of one conveyancer with another, the consumer is not comparing ‘like with like’.
Regulation to reflect professional obligations could address this.
In terms of the performance of there conveyancer there are plenty of independent review sites to which a consumer has access and which should assist a consumer making an informed decision.
Wider publication of the recorded activity of each conveyancing business at the land Registry could also help a consumer to identify the conveyancers who work predominately in residential conveyancing.
Q6. What improvements can be made to the process of property searches in order to speed up home buying and selling?
There is too much data presented in these searches, and it can be quite overwhelming for the consumer when it comes to discerning what is important, and what is not. A ‘traffic light’, and more condensed presentation, would be much more consumer friendly.
Q7. Would there be an advantage to encouraging buyers and sellers to use the same conveyancing provider? a. If so, how could it work, without creating conflict of interest problems?
This should be avoided at all cost. The scope for conflict and the importance of receiving totally independent advice , can not, and should not be ignored, and there is no evidence that one conveyancer acting for both parties reduces cost and delay. On the contrary it can often cause more delay and added cost, especially when a conflict arises and has to be addressed.
Q8. How would a predominantly digital conveyancing process affect home buyers and sellers?
Conveyancers should be encouraged to embrace technology, and to make use of it, as we have done, to promote transparency and speed into every thing we do.
All of our clients have 24/7 access to their electronically held conveyancing file, and all of the interaction we have with our clients and other conveyancers is undertaken ‘on line’.
Our clients see post and other communication as and when it arrives and are able to view all developments in real time.
All of their data and documents is securely retained in a property log book to which they have lifetime access.
This is the future of conveyancing, and the benefits to the consumer, and indeed to our business are immense and far reaching.
Feedback has been very positive, and we are constantly seeing clients returning to us.
‘Data rooms’ are already the norm in the sale of new build property, and with the proposed shifting of the onus from the buyer to discover, to the seller too disclose, technology of this type would clearly help.
Q9. What should the government do to accelerate the development of e-conveyancing?
Conveyancers need to wake up and look to make use of all of the technology which already exists within the market. They also need to make a shift in mind set. Too much tradition is holding back many conveyancers from embracing technology. The large majority of those looking move home expect or will be expecting conveyancers to be making use of technology .
All Government can do is to made public bodies more technologically accessible, in the hope by doing this, the benefits of e-conveyncing will be difficult to ignore, even for the most traditional of businesses.
Making it easier and cheaper for businesses, like our own, to connect to public data holders, such as the Land Registry/Councils, and to also provide funding to make technology more accessible to smaller conveyancing businesses, is a must.
To also offer reduced registration fees to conveyancers who use technology to interact with the Land Registry.
To make more use of the Land Registry Title Register by including additional features such as:
- The existence of indemnity insurance if taken out to address a title defect
- The history of prior transactions and details of the conveyancers who acted on each transaction
- ‘Live viewing’ of the register to enable to see pending registrations
- Public adopted highway markings on the title plan
- Interactive mapping to be able to see a summary of the titles of surrounding land
Putting more pressure on councils to digitise data and make this more accessible to conveyancers who wish to access it direct is essential.
Q10. Are there any particular public sector datasets which you think should be released as open data in order to drive innovation in the home buying and selling process?
Yes. See above.
Q11. How could other parts of the home buying and selling process be improved through better use of digital technology?
Technology could be used more effectively by lenders in terms of it communication. Many of the large lending institutions still rely on fax to communicate. The development of online portal to facilitate the sharing of data and communication would reduce delay and help to combat fraud.
A lot of delay is caused at the outset in carrying out client due diligence. At present the consumer could be subjected to these checks not only by the conveyancer, but also be the lender, the mortgage broker and the estate agent. Unnecessary duplication that could be addressed with greater intelligence sharing using technology.
Q12. What more could be done to encourage borrowers to seek a Decision in Principle from their preferred lender before they start house hunting?
The idea of reversing the caveat emptor basis for selling would make it easier for the decision to be obtained, as all the information the lender, and indeed borrower, would need to know about the proposed security would be available at an early stage of the process.
Q13. What other improvements could be made to the process of applying for and obtaining a mortgage?
See reply to Q11.
For greater protection against fraud, lenders do need to be more willing to share intelligence with panel conveyancers and to do this electronically. At the very least, the conveyancer should have early sight of the mortgage application form and mortgage valuation report.
Q14. How do we ensure buyers and sellers are able to access good guidance on buying and selling homes?
There is already a wealth of good and reliable information in the public domain.
The Government could do more to promote the benefits of choosing a conveyancer who belongs to a respected association such as the Conveyancing Association or the BOLD Group, and or is endorsed by the Law Society’s Conveyancing Quality Scheme.
Q15. Should sellers be required to provide more information before they market their property? a. If so, what information should be provided?
This is covered in some detail above.
Q16. Should sellers of leasehold homes be encouraged to engage with their freeholder before marketing their home for sale? a. If so, in what ways should they engage?
If as we propose the onus is on the seller to provide upfront disclosure, then in addition to the survey, extended property information form, the seller would need to provide the lessor pack from the freeholder/managing agent, and make this available to the buyer.
Again, this would save time once the transaction is up and running.
Q17. How can government increase commitment to a sale between buyers and sellers? a. Would development of standard agreements help?
The idea of a pre-exchange deposit is a good one.
By providing information about the property and the legal title upfront the buyer is far more informed, and in this case would be more inclined to pay a ‘pre-contract’ deposit to show commitment.
Q18. How should we best tackle guzumping?
Generally though building more affordable housing. Guzumping occurs due to a shortage of property, particularly in London.
By allowing a deposit to be taken after the delivery of the contract pack, and before exchange, should reduce the scope for guzumping, assuming the size of the deposit acts as a sufficient deterrent
Q19. What other steps could be taken to increase confidence in the housing chain?
This is covered in greater detail above.
Greater transparency through the delivery of upfront information and documents is the key.
Q20. Should managing agents / freeholders be required to respond to enquiries within a fixed time period? a. If so, how could this be done?
By making sure the seller has the information before a contact is submitted to a buyer. Making it a requirement that the information has to be delivered within say 28 days of request, and that if it is not, then no fee can be charged, would clearly focus the attention of the agent.
Q21. Should maximum fees be set for the services and information provided by managing agents / freeholder to home buyers and sellers? a. If so, how could this be done?
There should be a set fee for this information, and some of the data should be make available free, especially data which does not change from one transaction to another. For example:
Notice of Assignment requirements
Draft Deed of Covenants
There should also be a requirement which prevents a freeholder/managing agent from registering a restriction without recording on the Land Registry title document, the requirements needed to remove it or comply with it. Too much time is wasted chasing for this information.
Q22. Should the government introduce standard mandatory forms for collecting information about leasehold
The LPE1 form is adequate and fit for purpose, and all providers of information should be required to submit the data in this format.
Q23. What can be done to improve the customer experience of buying a new build home?
This is an area of home selling which needs to be looked at closely.
There is is not enough transparency within those who feature in the selling and buying of new build property.
The developer and selling agents should be required to disclose any arrangements they may have with brokers and solicitors to whom they direct buyers. More than often the arrangements between these stakeholders is not transparent, and questions of true independence often arise.
The paying of a reservation fee should also be subject to a ‘cooling’ off period.
No property whether built or not at the time of sale, should be marketed without full details of the legal tenure, the main features of a lease ( if applicable), ground rent and review details, service charge and the last date by which the property will be ready to be occupied. There is far too much uncertainty around what the seller is looking to sell, and when the property will be ready to move into.
There should be a ban on the seller being able to charge the buyer a fee for the engrossment of documents.
The documents provided by the sellers solicitors are extensive, and often make little sense to the buyers solicitors, let alone the consumer. A legal summary should be prepared and made available. The reversal of the caveat emptor rule here would provide the consumer with greater certainty and comfort.
Q24. What more can be done to help buyers of new build homes quickly secure a mortgage offer?
Allowing the consumer the freedom to search the whole market and not the market controlled by the tied broker would be a good start. Too much pressure is exerted by the selling agent to make sure the consumer does not go outside the ‘group’ of the developers preferred partners.
Clearer information about the development and the construction should be made available to the consumer at the point of viewing, so that this can be passed onto a prospective lender.
Q25. What else should the government be doing to help improve the home buying and selling process, and reduce the cost for consumers?
Incentivising the conveyancing industry through ensuring the conveyancer is not the least remunerated stakeholder in the process.
I accept there needs to be competition, but to expect the conveyancer to make the consumer’s journey quicker and less stressful, and to embrace technology for this purpose, surely there needs to be some recognition that the role the conveyancer plays is a valued one.
By making the rewards for the conveyancer fair and more in line with estate agents, brokers and surveyors, surely this would encourage more experience to return to the market, and also allow conveyancers to re-invest more into making sure the system works and works well, and is developed using technology.
Most conveyancers work on fixed fees. This means the longer the transaction takes the less money they make. More than often they make a loss. Most conveyancers when they compare the time it takes to complete a transaction with the fee charged, are seeing the hourly rate come out at between £30 and £70. Compare this with the hourly rate, for example, with that of a surveyor who would be collecting around £170 per hour.
Some form of scaled fees tied into the value of the property with lower and upper limits should be considered.
I acknowledge that this Call for Evidence is about the Consumer. However, a better quality and more expeditious service depends largely on those working within the system and on the resources they have available to operate and improve their service. Conveyancers should not be left to fester at the end of the ‘food chain’.
This is a public response to the Government’s Improving the home buying and selling process - Call for Evidence issued by Department for Communities and Local Government in October 2017, prepared on behalf of MJP Conveyancing Limited By firstname.lastname@example.org on 10th November, 2017.