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

Construction, Design and Management Regulations 2015 - Practical Implications for Conveyancers

Conveyancers should be alert to the Construction, Design and Management Regulations 2015 (became law on 6^th April of 2015) when considering recent alterations to both freehold and leasehold property.

If your client owns, uses or manages a building and undertake maintenance or minor building work associated with the business premises, your client has a legal obligation to ensure that all work is carried out safely without damaging anyone’s health. The law covers the all aspects of the building project from start to finish such as how it is planned, organised, managed, project time-scales and phases, the contractor, the designer, welfare of the workers and others on site and health and safety record keeping.

It’s a piece of legislation that uses good design and planning to reduce the number of accidents on site. The latest update means that, for the first time, regulations will apply to construction work commissioned by home-owners. Of the 43 fatalities on construction sites last year, three-quarters were on smaller sites, so the change is being implemented to recognise that the risk is not only on larger sites.

If regulations are not adhered to, construction work may have to be stopped, financial charges may be incurred if the HSE has to spend time resolving the issue. For serious breaches your client could be prosecuted.

From a conveyancing perspective the sale of property could be affected if there is any renovation or other work carried out by a builder who does not comply with the rules.

Under the new rules all builders, whatever their size, working in the domestic sector will have to create a construction phase safety plan for all building projects and all domestic projects will have to meet the same basic standards for the provision of welfare facilities as commercial projects.

For the domestic residential market this means that any construction projects finishing after the 6th April need to have a ‘handover pack’ including ‘built drawings or specifications of components that have been installed.

The responsibility of the home-owner to be clear on who is responsible for site health and safety, and chase the relevant documents at the end of the project.

Clients should be aware that their exposure to claims in negligence has potentially been raised as a result of these Regulations.  In many cases breach of statutory duty is no longer a cause of action itself (Enterprise and Regulatory Reform Act s69), however statutory duties may still influence the existence of a duty (or the reasonableness of behaviour) in negligence claims. The imposition of a number of positive duties via these Regulations may result in a higher expectation of ‘reasonableness’ in the common law context and may therefore lead to personal injury claims against domestic clients that would not have arisen in the past

Practical Implications

If acting for a seller then you should be alert to building works which have commenced but are in still in progress or which have finished after 6^th April 2015 and to ask you client to provide evidence of compliance with these regulations.   You should be ready to receive and respond to a request for a health and safety pack.

If acting for a purchaser then an enquiry along these lines about any recent works should be raised especially if purchasing a new build property.  Equally those who manage a leasehold property should also be asked for these details if recent works have been carried out to a block of flats, for example.  Perhaps the LE1 form should be amended to include such question.

In the case of a multi-let building where the landlord retains repairing obligations in respect of parts of the building it may be appropriate to check that the landlord has been given the health and safety file on completion of the tenant’s project.   Landlord’s when giving consent for works under a lease should make a condition of a license to require the tenant to produce the health and safety pack.

Sorry but yet another regulatory obligation to add to an ever growing list for the underpaid and over worked conveyancer!

MJP Conveyancing 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

How will the outcome of the 2015 General Election affect the new build market?

The question of whether we will be living under a red or blue, or a mixture of both, Government will soon be known.  How this will affect the new build market is also unknown and has created some uncertainty.

So what is likely to happen going forward, depending of course, on who lands up as the governing force.

The Conservative Party has committed to build 200,000 starter homes (built for first time buyers aged under 40 with a 20% discount) and 275,000 affordable homes by 2020.  Relatively small numbers and it is no clear whether the latter is in addition to the 200,000 starter homes.  The Labour Party is also looking to build a similar number of starter homes by 2020 and has committed to the establishment of a Future Homes Fund for investment in increasing housing supply.

It has similarities with the Liberal Democrats idea of a Government backed Housing Investment Bank to provide long term capital for major new settlements and to help attract finance. The new home start figure for the Liberal Democrats is set higher at 300,000 each year. They also commit to set in motion at least ten new Garden Cities.

Looking to make it easier for those looking for a home in the area in which they live is high on the priority list for Labour and they have promised to give priority to local first-time buyers in new housing areas.

In an effort to encourage owners of empty properties to sell Labour will be looking to allow local authorities to charge higher council tax on empty house.  The Conservatives have outlined plans to unlock and allow development on certain brownfield sites to enable 400,000 new homes to be built. Again it’s unclear whether this is an addition to the 200,000 new starter homes and 275,000 affordable homes.

This is all well and good and shows a broad acceptance across the parties of the need to build more new houses and to make these affordable to those looking to get on the property ladder.  The numbers proposed are however relatively small and do not meet ( apart from the Liberal Democrats) the 250,000 new homes each year that some commentators consider to the correct number to keep up with demand.  The truth is that we have never come close to this figure and as long as we fall behind with development economic recovery will remain volatile, rents will continue to rise and the cost of buying a property and keeping hold of it will remain an issue for many. People on ordinary incomes should be able to buy or rent a high quality home at a price they can afford today, and have confidence they will be able to afford tomorrow.

The major problem which none of the main political parties have so far fully addressed is the lack of competition in the new build market.  By 2012 70% of new homes were built by large house building concerns.  This is not surprising when land is so expensive and only the larger developers can afford to purchase.  The issue is that they all approach development in the same way, that is to minimise build cost and maximise sale prices by releasing homes slowly.   If there is a downturn in the market they reduce output and this contributes to a deepening of the problem.  So what happens is that output only increases when there is an acceptable level of house price inflation.

So in short land needs to be made available at a price which will enable smaller and less resourced builders to compete and or those smaller builders and developers need access to affordable finance to allow them to build good quality homes at affordable prices.  I will not hold my breath!

MJP Conveyancers 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

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

Do not purchase a New Build Property without first reading this....

Buying a property which has yet to be built, or which is newly constructed should be approached with care and here are some tips which will help:

Remember those friendly and helpful people within the sales offices are sales people and are no different from those people who you would find in car and double-glazing showrooms.  They are paid on results and work under the pressure of targets.   Once they have you signed up they will be your best friend and be in regular, sometimes daily, contact until they have collected all of you money.   There are many instances when this shadowing could be conceived as harassment.  If you consider there is undue pressure look to see if the developer subscribes to the Consumer Code for Homebuyers (http://www.consumercode.co.uk) and make a complaint.

• At the outset you will be asked about whether you have a mortgage and a solicitor to undertake the legal work.   You will be steered towards making use of the developers preferred brokers and solicitors.  These are ‘partners’ who have been chosen to work with the developer as the developer expects those partners to report to them regularly and to do all they can to ensure the developer meets its sales targets.  The sales team will push you to use these partners often saying it will be less expensive and a lot quicker.  More than often it is not.  I have heard of a case where a potential purchaser who was insisting on using her own solicitor was told she could only do so if the developer’s head office permitted it!  There is also a high level of misinformation given about other conveyancers e.g 'they are too slow', ' they are not very good'. 'we would not recommend them' etc 

• The use of the developers preferred partners should be avoided for several reasons

• How can you guarantee that the preferred partner is not acting with only you best interests at heart?  The ‘tie in’ with the developer could lead to a conflict of interests. They might be less willing to advise you not to purchase in fear that if they did this could lose a tie to a lucrative source of work. This a particular risk when purchasing a leasehold new build property and when advising on onerous rent review clauses.  

• You may not be getting the best deal in town.   You may be able to get a more competitive fee/mortgage product elsewhere if you were able to shop around.

• Make sure before you sign the reservation form and part with your hard earned cash that you seek legal independent advice because once signed you may if you withdraw lose your reservation fee.  If the developer subscribes to the Code you should be able to recover most of your reservation fee. 

• Many developers are selling more properties on the back of the Government’s Help to Buy Scheme.    This is a gift from heaven for some sales teams as is makes the sale that much easier.  Beware however of signing up before understanding fully the ins and outs of the scheme.  I doubt many of those selling understand the scheme and are failing to provide any or an adequate explanation of its workings at the point of sale. For further information visit here: https://www.gov.uk/affordable-home-ownership-schemes/help-to-buy-mortgage-guarantees    Keep in mind you may be paying more for the property than you might have otherwise paid if you had purchased outside the Help to Buy Scheme.  Always get the property independently valued. 

• There are other important aspects of the purchase which you may not be told about at the time you are asked to sign the reservation form

• If it is a leasehold flat you will be required to pay an annual service and ground rent charge even if the estate is not fully developed. This can amount to an extra payment of £200 – £1000 each year.  The ground rent charge is likely to be reviewed and increased from time to time. Make sure you understand the basis of the review.  Onerous rent review clauses could make the property difficult to sell.  My advice is not to purchase a new build leasehold where there is a rent review clause that provides for the rent to double at regular intervals. 

• If it's not a flat you may still be required to make a contribution towards the cost of maintaining shared facilities such as a play area for example.

• You will be required to pay a contribution to the cost of the developer’s legal costs even though the documentation is on a word processor and takes little effort and resource to produce.

• It is unlikely that you will see your final completion statement detailing extras and other expenses until a few days before you complete making it difficult for you to query figures.

• There is a date by which you must exchange otherwise you will lose your reservation fee. Make sure you are happy with this deadline and if you agree   new deadline make sure it is confirmed in writing and be careful as it is known that contracts can be withdrawn before exchanged with little notice, especially if the sales office can find a buyer who might be prepared to pay a higher price.  

• The contract and other legal papers you will be required to sign are looked upon as ‘closed’ meaning the developer will generally not allow your solicitor to make any changes to the provisions it contains.  

In conclusion my advice is as follows:

• Ask yourself is a new build the right property for you  - don’t get carried away with the sales talk. 

• Always take independent legal advice on the legal aspects of the purchase before signing a reservation form and handing over the reservation deposit.  If in doubt see if you can agree a reduced deposit so as to minimise the penalty if you have to pull out before signing the contract to purchase. 

• Resist the pressure and tactics deployed to persuade you from the using the developers preferred legal or broker partner and make a free choice on the advisor you choose to look after your interests.

• Make sure the sales person tells you all about the Help to Buy scheme if it applies and also about all hidden costs such as service charges and ground rent.

• Find out before you sign what other building is to take place around the plot you are purchasing and when will the whole development be concluded.  Ask also about the developer’s policy on Social Housing and where this part of the development is to be based.  These are important factors since they could impact on you use and enjoyment of the property.

• If the purchase involves a doubling rent review clause keep well way from the property. 

MJP Conveyancing 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 davidp@mjpconveyancing.com 

Government to support buyers of new build homes

The Government has today announced it will in March launch a scheme which is aimed at those looking to purchase new-build homes.  

The ‘NewBuy Guarantee scheme’, will allow lenders to offer large mortgages on new-build homes without running the risk of losing money if the property falls into negative equity and is repossessed. Essentially the loan will be guaranteed by the developers and government (taxpayers).

It is hoped this will enable would be movers looking to buy a new-build property up to the value of £500,000 to overcome the problem of finding  large sums of money to put down as a deposit.  The scheme is looking at underwriting 95% mortgages.

It is reported, Nationwide building Society, one of the lenders which will take part, is currently working with the government to work out exactly how the scheme will operate.

The Council of Mortgage Lenders said discussions are on-going, and when the final details are announced the £500,000 cap could vary around the country.

MJP Conveyancing welcomes this move but as similar schemes have in the past operated  with little impact, we will wait and see what affect this will have on lifting the deposit affordability barrier which continues to dampen the growth within the property market.

Morgan Jones and Pett solicitors offer a fast, low cost and professional home moving service with prices starting at £230 plus VAT. Call now ion 01603877001 or via email at davidpett@m-j-p.co.uk for a FREE quote