How should you advise clients buying new-build properties? John Wallace provides the construction lawyer’s perspective
When studying law at university, I played in a five-a-side football team called “Caveat Emptor”. Our team, made up of first- and second-year law students, would often get asked “What does Caveat Emptor mean?”, and I remember the look of utter disappointment when it was explained to them that it just meant “buyer beware” – they were expecting something much more exciting! But for the conveyancing lawyer, the phrase “buyer beware” also reminds us of another immutable fact: “lawyer beware”. If you miss something, it could come back to bite you.
The risk of unforeseen issues arising is greater where the boundaries of conveyancing law cross with construction law, and this article intends to outline the key issues that you need to think about when acquiring new-build properties on behalf of your clients.
The reader is better placed than I am to set out the details of due diligence required on the purchase of a new-build property. Here, I only suggest a few as an aide-memoire – this is certainly not an exhaustive list.
- Are there any planning conditions or obligations attached to the planning permission for the development?
- Are there any restrictions on future development? This could be a restriction on future extensions (even under permitted development rights), or even a requirement that a hedge borders a garden rather than a fence (I have advised on a costly dispute relating to this).
- If the development involves the building of a new road, has it been adopted by the local authority? Is there an obligation to build the roads to the standard required by the local authority?
- Does the contract contain sufficient detail regarding the property being built to the agreed specification?
- Is there any cladding that may be cause for alarm?
- Is an obligation for the drains and sewers to be adopted by the relevant water company at no cost to the buyer? This is essential.
- Does the transfer contain easements for the use of the estate roads, drains and sewers (if they have not yet been adopted)?
- Does the contract ensure that the developer is responsible for insuring the property until completion?
The contract should also include a mechanism for calculating the completion date, dependent on the progress of works on site – this is normally calculated as a set number of days following practical completion. There should be a target date for practical completion and a long-stop date, after which the buyer should be entitled to terminate the contract if the works are not practically complete. Practical completion, helpfully, has no specific legal definition. The contract should include a provision for an expert to determine whether the property is practically complete.
The Consumer Code for Home Builders
Check whether the seller is required to comply with the Consumer Code for Home Builders.
The code came into effect in April 2010 and applies to all home builders registered with the UK’s main new home warranty bodies (the National House Building Council, Premier Guarantee, Local Authority Building Control and Checkmate). It consists of 19 requirements / principles that the builders must meet in their marketing and selling of properties and their after-sale customer service. It is a voluntary code of practice, but builders that are registered with one of the home warranty providers participating in the code must comply with it.
The code sets out requirements relating to (among other things):
- reservation agreements (including the reservation fee, what is being sold, purchase price, how and when the agreement will end, and how long the price remains valid for)
- an explanation of the home warranty cover (see below)
- a description of and any costs of management services and organisations to which the purchaser will be committed
- the contents of and the standard to which the property is being built
- a clear, fair and compliant contract for the purchase of the property
- an accessible after-sale service (what it includes, who to contact and the guarantees / warranties that apply to the property).
Defects and snagging
There is obviously a distinction to be drawn between a substantive defect and snagging. The contractor will be required to undertake works to remedy any defects or snagging (the checking of works for minor faults) within two year from practical completion, and such minor defects are to be expected. After the two-year period, the purchaser has no recourse against the contractor, and must rely on its home warranty or buildings insurance.
Your client may encounter any of the following defects:
- design problems (for instance, in a block of flats, 30-minute fire partitioning where it should be 60-minute partitioning)
- material deficiencies (such as non-waterproof plasterboard in a bathroom)
- specification changes (such as a poor-quality kitchen in substitute for the designer kitchen in the specification)
- workmanship issues (such as poorly applied render or cladding to the exterior of the property).
Your client will not automatically have a direct contractual relationship with the contractors that built the property. Therefore, it is usual for the contractor and its sub-contractors to enter into collateral warranties that are assignable to any future buyer. The collateral warranty gives the buyer a direct contractual link and ability to sue the contractor, sub-contractors and professionals (such as the architect, structural engineer and so on) in respect of any defects in the works. Given that developers often set up special purpose vehicles for each project, which are then dissolved on the sale of the last unit, it’s vital that the buyer has recourse against the contractors and professionals. The form of collateral warranty is very important, as any inconsistency with the building contract may render the collateral warranty unenforceable.
In undertaking due diligence on a new-build property, you should ensure that you have identified the main contractor and sub-contractors, the form of standard building contract used, and any letter of intent or pre-construction services agreement (used to allow the contractor on site to start works before the building contract has been finalised).
A warranty is not a legal requirement on the construction of a new home. However, 10-year warranties are commonly provided by developers through the home warranty bodies referred to above. The warranty, in favour of the buyer, covers construction defects and ensures that the contractor is liable to return to the property within the first two years of the warranty period to make good any defects. After that, any claim under the warranty is likely to result in a third-party contractor attending to remedy defects.
Professional indemnity insurance
The contractors and professionals – the subject of the collateral warranties – should have professional indemnity insurance (PII) in respect of any design defects in the property: obtain a copy of the policy, and check it’s valid and provides sufficient cover. The PII does not cover construction defects, which are normally covered by the new home warranty. Insurers are generally keen to avoid any unnecessary costs relating to litigation, and settlement of bona fide claims is the norm, but note that settlement monies may not cover the full cost of remedying the defects.
On 22 February 2020, housing secretary Robert Jenrick informed the House of Commons that the government was launching a New Home Ombudsman, saying: “It’s completely unacceptable that so many people struggle to get answers when they find issues with their dream new home. That’s why the ombudsman will stop rogue developers getting away with shoddy building work and raise the game of housebuilders across the sector.” It remains to be seen if the ombudsman will exercise its broad powers to award compensation and ban rogue developers from building new homes. Alternatively, parties can turn to the dispute resolution service offered by the Consumer Code for Homebuilders, if the seller was registered with them. You should also consider if a claim can be made against the home warranty.
The alternative, given that adjudication does not apply to home purchasers, and in the absence of alternative dispute resolution, is litigation, which can be financially prohibitive. Claims are often brought against contractors and/or professionals for breach of contract or professional negligence. Examples of the type of claims that might be brought include:
- defects to blockwork or brickwork
- inadequate foundations leading to subsistence
- structural issues relating to
- load-bearing walls
- issues relating to plumbing or electrical works
- failure to comply with building regulations or planning permissions
- poor finishing to plasterwork
- lower-specification fixtures and fittings being installed compared to those set out in the contract
- discoloration to external brickwork caused by faulty, or lack of, drainpipes
- the use of acids to remove detritus
- overspray of render onto other external areas.
Due diligence is key, but there will always be latent defects that cannot be foreseen but become apparent once the property settles into its foundations. There should be a real focus on ensuring that the documentation is right to ensure the buyer has redress and can get any issues remedied so that they can enjoy living in their new home.