The New Build Ticking Time Bomb

Most large developers of new build property actively look to steer buyers in the direction of a ‘friendly’ conveyancer.  This step is taken for several reasons mainly to do with the developer’s desire to exercise a degree of control over the buyer’s solicitor.  The influence exercised is discreet but there is no getting away from the fact is exists and raises serious professional issues in relation to conflict of interest and independence.  I wonder how many of these conveyancing firms report this situation in accordance with Chapter 10 (Solicitors Code 2011) obligations and or in accordance with COLP reporting requirements.

This situation has come more into focus with the recent uncovering of failures on the part of some of these firms to advise fully on the mechanics and long term consequences of rent review clauses contained in leases.  It is claimed that this failure is widespread and could result in a wave of professional negligence claims.

Many buyers of leasehold new build property have been unaware that the ground rent on new-build leasehold properties purchased can escalate dramatically in the future.  This is where the lease provides for the rent to be double every 10 years, for example.   Some developers have changed their approach and have linked the rise in ground rent to the retail price index which is a much fairer and less onerous mechanism. 

In a statement issued by one of the large developers Taylor Wimpey it is stated:

“We reviewed the mechanism for ground rent increases in 2011 and decided that the RPI was a more appropriate measure going forward. All Taylor Wimpey homes on developments commenced after 2011 have been sold with ground rent increases linked to the RPI. All purchasers have independent legal advice.

“Until recently, we hadn’t been aware of the concern of some customers and homeowners regarding these pre-RPI clauses and the difficulties that they are currently experiencing in selling or mortgaging their homes. Having heard the cases described and in order to establish the facts, we are undertaking a review.”

A conveyancer acting for the buyer owes both the buyer and if the buyer is purchasing with a mortgage, the lender a duty of care which would require that conveyancer to bring to the buyer’s and lender’s attention any part of the lease which could be viewed as onerous and which could materially affect the value of the property.

In addition to this the Consumer Rights Act (2015), gives home owners the opportunity to seek legal redress against solicitors where they can prove they were not given adequate information to make an informed decision.

Many of the ‘friendly’ conveyancers concerned are financially dependent on this type of ‘referral’ and it must be questioned whether the advice they provide to buyers is completely independent. Some cannot afford to lose this source of work and often hesitant to do anything which could be seen by the developer as ‘hindering’ the progress of the transaction. The degree to which this may have contributed to the failure to properly advice has yet to be investigated but it is clear that given the spate of professional negligence claims it will not be too long before this well-established practice within the industry is fully exposed.

It will also be interesting to see how the role of the developer’s selling agent will be viewed and considered.  Many of these agents are paid on a commission basis and are often very ‘pushy’.  There have been examples quoted of an agent ‘selling’ the property on the basis of a monthly ground rent figure rather than a yearly figure resulting in a misleading picture of the true cost of the purchase.  It will be also interesting to see whether a Court could look to apportion some or all of this liability in the developer’s direction if it could be shown that the relationship between the developer and the ‘recommended’ solicitor was so close that it amounted to an ‘agency arrangement’.

Cosy arrangements of this type must come to an end ( as they do not serve the buyer’s best interests)  and it seems the bubble enjoyed by many may be on the verge of bursting soon.

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at david@mjpconveyancing.com

Beware of the Help to Buy Scheme

The Help to Buy shared equity scheme designed to get people onto the housing ladder has its benefits but those who may be enticed by developers to make use of the ‘leg up’ must exercise some caution.

There are clearly signs that the property market is recovering, with the Royal Institution of Chartered Surveyors reporting that demand rose to its highest level for more than three years after the April launch of Help to Buy. New buyer inquiries were at their highest level for more than three years, and the scheme was starting to make an impact, the institute said.

However some of the methods developers are using to market their properties to first-time buyers who might be eligible for the Help to Buy shared-equity programme are being called into question.

What is the Scheme?

Under the scheme, which is expected to trigger 74,000 sales, the taxpayer provides an interest-free loan of 20pc of the purchase price for five years, to enable a borrower to buy a newly built property. Home buyers still need a 5pc deposit, but this additional loan should enable them to buy a property they couldn't otherwise afford. Help to Buy mortgages can be used on properties valued up to £600,000.

Participating mortgage companies will then grant an advance of the remaining 75pc of the value. After five years, the homeowner has to pay interest on the outstanding 20pc at a rate of 1.75pc, although this will rise by inflation plus 1pc annually thereafter.

However, it has been reported that developers are marketing their properties at prices 20pc below the correct asking price, implying that the equity loan is a discount or free gift.

A property for sale by a certain large developer, for example, priced at £439,500, was also advertised separately at £351,600 – indicating that the property was cheaper than it actually was.

Slicing money off the price implies it is a gift from the Government. It is not. An equity loan is precisely what it says it is. It is a loan that has to be repaid. This may encourage people to take on debt, which is not understood, or to overstretch themselves and buy properties bigger than they can afford.

New homes tend to be more expensive. According to the latest report from Halifax, the average cost of a newbuild home is £233,822. This compares with the average property price of £166,000 in April.

Indeed, a large section of the mortgage market has turned its back on the new shared-equity scheme. Only Halifax and NatWest, both part-owned by the Government, have embraced the scheme enthusiastically, although Woolwich is also offering Help to Buy loans.

So what are the pitfalls of this scheme?

·    You can participate only if you do not own any other property.

·   If you want to buy the Government out, you can do so, but there will be costs. You can increase your equity, but only in 5pc slices. Each time the property must have an independent valuation, which you will have to pay for.

·    You may also face problems if you want to extend or alter the building, as you have to seek approval, which may not be forthcoming. Increasing the value of the property through a large extension can make subsequent equity valuations problematic.

Advice

·     Buying a new property means you will be invariably be paying more for the property than the equivalent second hand property so make sure you look to negotiate the price down.

·    Look to work out how much you will paying under the scheme and the mortgage in 5 years time – will you be able to afford it.

·     Don’t be drawn in by misleading sales talk.

·     Remember it will  be expensive to increase your equity in the property.

Morgan Jones and Pett are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk