25/01/2012

The recent ITV Homes from Hell programme clearly illustrated the danger to borrowers and lenders of building new property on Architect’s Certificate.  The landowner commissioned an architect to design and supervise the building of a new house.  There were substantial problems with the construction and after many years of correspondence legal action was commenced against the architect only for it to be discovered that the professional indemnity insurance was limited to £250,000. Extensive legal activity commenced with the architect’s insurers, following which the homeowner received a professional indemnity payout insufficient to cover his legal fees and had to deal with the repairs at his own cost.

In contrast, NHBC is effectively an insurance company with backing/cover of £1 billion. If defects arise in the first 1-2 years after completion the responsibility for rectification lies with the builder but if they default the NHBC cover will step in.

After the first 2 years the initial point of claim is the NHBC who, providing the claim meets their criteria of having a minimum claim value of £1,200, and an identifiable defect which has caused damage to the property will involve NHBC arranging for one of the registered panel builders to undertake the rectification work up to their policy limits £1 million for a new property and £500,000 for a conversion – there is no recourse to professional indemnity or solicitors, and if the homeowner is not satisfied with NHBC’s response there is a speedy mediation process via The Ombudsman Service.

In practice, from identifying the claim to having the work completed should take no more than 4-6 months, and if an appeal to Ombudsman is necessary, this can take 9-12 months. There are other warranty providers e.g. Premier and Buildzone who offer warranty cover on a somewhat different basis, but again on an insurance basis rather than by pursuing legal action – in our opinion any lender should only accept Architect’s certification if there is a good reason why an insurance backed warranty is not available and after confirmation from their independent solicitors/surveyors that the warranty is suitably worded and that the architect has sufficient Professional Indemnity Insurance.

However, there were still dangers.  The customer may fall out with the architect partway through the project and the architect may refuse to issue the certificate, or the architect’s Practice may be unable to renew its Professional Indemnity cover.  It is important to note that PI cover is only available for claims made during the year of cover, so if a property is completed in 2009 and the architects PI cover ceases in 2010 there will be no redress against the PI insurers if a defect becomes apparent in 2011.

In the case of apartments the minimum claim value is still £1,274 in relation to defects affecting an individual apartment (£847 for property built before April 2004), but for claims affecting the structure of the development the minimum claim value is aggregated by the number of flats – so if there is a block of 30 flats the minimum claim value will be £38,220 – however, that is a minimum claim value, not an excess, so if the claim exceeds the minimum claim value the whole claim will be payable.

NHBC publicity states that they still have 80% of the market share of all new build housing. Their website offers members of the public extensive guidance, including information on the Consumer Code with a model code compliant plot reservation agreement.

Please note that it is no longer permissible for new housing reservation deposits to be non refundable. A word of warning in relation to new build properties which are let following completion – a guarantee does not commence until the first sale of the property, so if a property is let for 3 years before sale, the 1-2 year period of developers responsibility will commence on the first sale – after 3 years.  It is essential therefore that where new build properties are let by the developer, NHBC should be advised that the developer has taken over the property as first owner, and that the owners pack is provided to the developer, so that the 2 year initial warranty period commences at the date of first occupation – but is not delayed until the property is sold.