Flood Re has been in force for over a year, but it isn’t a panacea: many properties are excluded, and premiums will continue to rise even for those included. Sue Highmore outlines when, how and what you should advise clients around flood risk
You might wonder why climate science has any relevance to your conveyancing practice, but there is an increasing expectation that those advising homebuyers (whether the property is for their own occupation or as buy-to-let) will have to give some advice to clients on the risk to the property from flooding. This article tells you when, how and what to advise.
Ten years ago, this would not have been on any conveyancing checklist, unless, perhaps, the Land Registry plan showed a river or the coastline very close to the property. There were good reasons for this. There was little reliable information available to predict where flooding would occur and how deep the water would be; unlucky property owners had insurance against flooding so were returned to normality at no cost to them (albeit at considerable inconvenience); and property values were unaffected by past episodes of flooding, so lenders, buyers and sellers paid the risk scant attention. None of these excuses for apathy apply any more.
Why has flood risk moved up the agenda?
There are two main reasons.
a) Increasing flood risk to properties
This has been borne of climate change, indiscriminate building in unsuitable, flood-prone areas, and inadequate, ageing drainage facilities in many urban areas.
b) A hardening in attitude of the insurance industry to its exposure to significant payouts
Insurers’ losses after the 2007 flooding in England were in excess of £3bn. This led to protracted negotiations between the government and the insurers about how to establish a risk-reflective market for flood insurance. What insurers wanted was a level playing field, where each company could decide whether they wanted to take on the risk of offering flood cover to particular properties at all, and at what price. Just like other types of insurance, they wanted the premium to reflect the risk.
Over the same 10-year period, there have been huge improvements in the availability of data on flooding, where it has occurred in the past, where topography or ground conditions will mean flood water is likely to collect in future, and what difference predicted changes in climate will make to those conclusions. The Environment Agency has gradually, in the era of ‘open government’, made its data available to search companies (particularly that on flood defences and their level of protection). Rather than concentrate solely on river and coastal flooding, the data scientists and hydrologists have started to look at surface water flooding (flash flooding), which tends to result when there is concentrated rainfall over a short period that overwhelms the surface water drainage capacity. It might drain away more quickly than the other types of flooding, but it does just as much damage. Insurers don’t really care what the source of flooding is; they are looking at how much it costs to put right.
So there is now credible data that insurers and lenders can look at to assess their exposure, if they take on a property. They can price accordingly. This means it is important that property owners (existing and prospective) are equally well informed. Not just because they may find themselves dealing with the disruption, misery and adverse health effects of being flooded, but because buyers and lenders may now reduce the offer price for the property, to reflect the cost of taking remedial measures to keep the water out, or reduce the damage it will cause.
What does the Law Society say about what advice solicitors should give?
The Law Society offers quite clear guidance, in its flood risk practice note, that in all cases in conveyancing transactions, whether acting for the prospective buyer, tenant or lender, you should:
a) consider whether or not to mention the issue of flood risk to your client
b) if appropriate, make further investigations (or check whether the client is doing these themselves) – generally done by commissioning a flood search (in a similar way to making a contaminated land search) and asking questions of the buyer
c) consider advising the client to check with their insurers whether flood risk cover will be available
d) consider advising the client to discuss the flood risk with their surveyor or other expert.
It also, wisely, suggests you may wish to record these discussions and your client’s decision. It is very sensible to keep an audit trail, because a client who buys a property, then discovers themselves inundated and without appropriate flood insurance, will be looking for someone to blame.
Hasn’t Flood Re restored the status quo for residential property?
If you know about Flood Re, you are already well ahead of the game. This scheme is the product of the negotiations between the insurers and the government after the 2007 floods. It came into force in April 2016 and was heralded as ensuring that flood cover would remain both affordable and available, even for high-risk properties. Both premiums and excesses are fixed (varying a little by council tax band). However, Flood Re only benefits residential properties of some types. The scheme is certainly not a good excuse for conveyancing professionals to strike flood risk advice off their checklist.
Properties excluded from Flood Re must find their flood insurance in the open market. Owners of excluded properties with a high flood risk profile may find their insurer charges a much higher premium, imposes a higher excess (I have heard of excesses above £10,000), or requires them to comply with additional conditions (such as fitting and employing flood defence measures). Homeowners who have a mortgage will have little choice but to accept whatever terms the insurer is offering, as the lender will insist that the property has comprehensive buildings insurance, which (in the minds of lenders) includes proper cover against flooding. All this means that it is definitely ‘appropriate’ (quoting the practice note) to advise clients interested in non-Flood Re properties about the impact of flood risk on potential value, mortgageability and insurance costs / availability.
Which properties lie outside Flood Re?
The Flood Re website does set out which properties are eligible for the scheme, but it can be difficult to translate. The important list to have in your mind is of the properties excluded from Flood Re. These are:
- any commercial property
- any buy-to-let residential property
- any mixed use property
- any residential property built since the start of 2009
- all purpose-built blocks of flats (regardless of when they were built or how many flats there are), because these are likely to be insured on a block policy
- any property where the buildings insurance is taken out in the name of a company (because only policies taken out in the name of an individual are eligible for Flood Re cover) – this will exclude from Flood Re properties where the policy is taken out by a management company, service company or a corporate vehicle freeholder, which will include most blocks of flats and conversions of smaller properties into flats
- any property converted into four or more residential flats, even if the policy is taken out by an individual (freeholder or one of the flat tenants).
The net effect of this is that your client is only likely to be able to take advantage of the guaranteed cover offered by Flood Re, at its pre-fixed, reasonable premium and excess rates, if they own or will own a residential house (either freehold or long leasehold) built before 2009. That restricted group of clients may take the view that they neither want nor need to find out about their flood risk, because they will simply rely on the insurance to put them back to normal if flooding does occur. They should not be so complacent – Flood Re is only an interim scheme, designed to phase such properties into the world of risk-reflective premiums and excesses. The ‘reasonable rates’ charged by Flood Re will rise each year until, in 2039, those owners will be in the same insurance basket as everyone else, and may struggle to find insurance on acceptable terms if their property has a higher flood risk profile. Moreover, there has been talk (and it is only that, at present) that homeowners with Flood Re cover who make more than three claims for flooding damage will also be excluded from further cover.
How should solicitors advise clients?
1. Check the status of the property and the lender’s requirements
Identify whether the client owns (where acting for a seller) or wants to buy a property that will be excluded from Flood Re. Check what the lender’s requirements are (in the UK Finance Mortgage Lenders’ Handbook if not in the instructions) regarding flood searches and flood insurance.
2. Talk to the client about flood risk
Ask the client whether they are aware of the potential risks presented by flooding (both practical and of a discount on the property value), and remind them that flooding can come from many sources – overflowing rivers, high tides, ground water seepage and flash flooding. Explain that it is rarely obvious on the ground that flooding has occurred or might do so. Ask if they have made other arrangements to check out the flood risk profile of the target property (for example, through their surveyor). Be wary if they say they have looked at the free Environment Agency maps online and identified there is no risk (see stage 3 below for why this is not a reliable alternative). If they have only done that, or have done nothing, explain that there are ways to get a quick assessment of the potential risk from flooding, and ask if they want you to organise that. Record their answer.
3. Commission a desktop flood search
You and the client may have no choice about this if the lender prescribes one. Flood searches are offered by several companies, including Argyll Environmental, Landmark, Groundsure and Future Climate Info.
Select your search wisely, as there are many competing products, some of which may look attractively cheap, but which offer your client very little comfort. It is a false economy to pick a really cheap search if that just dumps in your lap (or that of your client) a lot of data that you cannot interpret or understand. As a conveyancing specialist on challenging fee margins, you do not have time and are not paid to do the analysis, nor do you have the necessary expertise to do so.
The client is better served by a search prepared by qualified, knowledgeable specialists, who assess the overall risk and give their opinion on whether it is high, medium or low (and who have decent professional indemnity insurance, in case their opinion turns out to be negligent). Some providers also offer an opinion on what flood protection measures may reduce the risk (something which, in the future, the government is hopeful insurers will take note of, reducing premiums appropriately where the homeowner has done credible work to reduce the headline flood risk).
Be careful when ordering a combined contaminated land search and flood search. Check that the flood element is as extensive as a full standalone desktop flood search would be. Some providers try to keep the cost down by pruning the number of datasets that are looked at to assess the flood risk, so you get a less comprehensive result.
Despite the fact that full flood desktop searches are very cheap (usually less than £40), some clients still find it very attractive to rely on the free online maps provided by the Environment Agency. Although this data has improved markedly, it is dangerous for clients to rely on the maps alone, for a number of reasons.
- They lack some data that the commercial search providers buy (in particular, ground water flood risk).
- They are not updated as frequently as some of the commercial data sets.
- Some of the online plans use assumptions that do not reflect reality (eg making no distinction between properties at the top and bottom of a hill, but blanketing them all together in the same category of risk because they are geographically close; or rating the flood risk as if there were no flood defences in place, even though, on the ground, there are flood defences).
- The scale of the maps is not always detailed enough to be able to tell the precise risk to one property (or, where that covers a large area) to particular parts of that property. By contrast, a commercial search that is reviewed by a specialist consultant can distinguish, in its results, between the flood risk to outer parts of the garden, or car parking areas, and any lower flood risk to the buildings themselves.
- The detail of the coverage of surface water flooding varies from area to area.
- The website offers no overall risk rating and no professional indemnity insurance cover, and users cannot sue if the answers the plans give turn out to be wrong.
Conveyancing professionals should also never offer to look at the maps for clients. Without the necessary training to interpret the maps, or appreciate their foibles, they may draw the wrong conclusion.
4. Make enquiries of the seller
Raise enquiries of the seller to flush out whether there has been a problem with flooding (either of the property or in the area) in the past. If so, what sort, where and with what results? Usually it is safe to start with the flooding questions on form TA6 (or CPSE.1 for higher-value residential property). However, as with most enquiries, there is a strong risk of receiving an unhelpful answer, inviting your client to do their own research. This is why you should never rely on enquiries alone; instead, twin-track those with a desktop flood search.
5. Report to the client
Here is where it pays to have selected a search that presents the results in a user-friendly way (perhaps a traffic light system, or bar graphs to show the risk from different types of flooding). In these cases, you can simply supply the search results to the client. They can then contact the search provider directly if they want to find out more, arrange a more detailed, on-site assessment, or establish what flood protection measures could be installed to reduce the risk.
If the search result discloses an elevated flood risk, encourage the client to establish early on whether the property will be insurable against flooding, and if it is, at what premium / excess. Armed with that information, they may want to reduce the offer price so that they can afford to install flood protection measures, such as flood barriers, pumps or elevated electrical sockets. Depending on the type and depth of likely flooding, these can be very successful at reducing the impact of flood waters.
It is inevitable that conveyancing professionals will be drawn into advising clients to investigate the flood risk profile of their target property. This article should make it easier to do so confidently, quickly and efficiently.