Defects in new homes – all change?

A New Homes Ombudsman is being introduced by the government’s landmark Building Safety Bill and will be brought to fruition by Natalie Elphicke MP, who is overseeing the appointment of the ombudsman and the creation of a code of practice. As a result, in early 2021 there will be a new sheriff in town to impose new rules on the housing market, offering purchasers a means of redress for problems with new homes.

Given the proposed wide scope of the ombudsman’s remit and the punitive powers available to them – awarding compensation, requiring developers to undertake further work, requesting apologies and explanations – this could have a significant effect on the housing industry. It is interesting to note, for example, that housebuilders will be obliged to be a member of the ombudsman scheme – and that one of the more draconian penalties they could face for poor performance is expulsion from the scheme. Expulsion would therefore make it unlawful for them to engage in the development and selling of new-build homes. As the government said during the consultation process, that is a powerful deterrent for non-compliance.

Dealing with snags, defects and complaints has always been a critical part of any housebuilding project and requires a detailed understanding of the various contractual and statutory mechanisms that govern defects (and claims in relation to defects) – including sale agreements, new homes warranties and the Defective Premises Act 1972. This is the complex matrix in which the ombudsman will need to operate –- or possibly to bypass – if it is to achieve the government’s stated aim of offering purchasers better protection and faster redress, so that problems are put right when things go wrong.

One of the more draconian penalties for poor performance is expulsion from the scheme – which would make it unlawful to engage in the development and selling of new-build homes

Sale agreements

The contractual relationship between developer and purchaser is governed by a sales agreement. Where the property has not yet been completed, such an agreement offers the purchaser some assurance that the developer will exercise reasonable skill and care, build in a good and workmanlike manner and use appropriate materials.

Those obligations are, in turn, likely to reflect the minimum obligations of the contractors and designers who are actually undertaking the work.

In the event of a dispute, the theory is that the developer (i) passes on the purchaser’s claim to the contractor (effectively adopting the purchaser’s claim as its own) and (ii) passes on the contractor’s defence to the purchaser (again, effectively adopting the contractor’s defence as its own). In this way, the developer remains largely neutral in any dispute – at least for as long as the contractor is solvent.

In the meantime, the sales agreement might permit the developer to return to remedy any defects – but not always.

The government has said that the new code of practice will cover not only the building process, but also the selling process. The ombudsman could therefore have a real impact on future disputes arising from the contract terms in sales agreements.

Equally, however, the ombudsman will not be able to deal with multi-party disputes in the same way that the courts do. This could result in some parties being drawn into multiple, different – and potentially inconsistent – dispute resolution procedures.

New homes warranties

New homes warranties are a form of insurance for purchasers – with plenty of conditions and limitations. Invariably a warranty is split into three phases: (1) between exchange and completion, (2) up to two years after completion, and (3) two to 10 years after completion.

Before completion, the warranty protects a purchaser’s deposit. During the first two years after completion, the warranty provider’s role is often limited to providing a dispute resolution service and, ultimately, a guarantee in the event that the developer does not fulfil its responsibilities. During years two to 10, the warranty usually only covers major structural issues.

The value of a warranty can, therefore, be fairly limited. A purchaser may still have to engage with the developer to resolve their complaints. Similarly, a developer will often still have to address snags, defects and complaints. And where a warranty is engaged, the warranty provider may still look to recover its losses from the developer.

However, with the ombudsman scheme expected to be limited to disputes worth £50,000 or less, there will still be a role for warranties in offering purchasers protection against significant problems.

Professional consultant’s certificate

The alternative to a warranty is a professional consultant’s certificate, which confirms that the property is constructed to a satisfactory standard and in general compliance with approved drawings. This can provide comfort for any significant issues that may arise, particularly where there are no easier routes for a purchaser to claim against the developer.

Such certificates are not, however, popular with many mortgage lenders and (understandably) with consultants’ professional indemnity insurers. They are also not simple or straightforward to enforce, and effectively require a purchaser to prove that the consultant has been negligent.

The Defective Premises Act 1972

The act requires parties working on a dwelling to undertake their work in a professional or workmanlike manner, to use proper materials and to see that the completed dwelling is fit for habitation. The duty is owed not only to the original purchaser, but to subsequent owners as well – and so the act protects people who may otherwise have no contractual or other relationship with the original design and construction teams.

Whether or not a dwelling is fit for habitation is, of course, a question of fact – properties constructed on an inherently unstable hillside, or with no damp-proof course, or with inadequate or defective foundations have all been found to be not fit for habitation.

Attempting to summarise what this means, the courts have said that to be fit for habitation, a property should be capable of being occupied for a reasonable time without risk to health and safety, and without undue inconvenience or discomfort. That is a fairly generic test, which is not easy to apply to any given set of circumstances.

The complexities of the act, and the risk that this introduces into any dispute, offer a prime example of where the ombudsman scheme and the new code of practice that it will uphold are likely to simplify matters for aggrieved purchasers.

Conclusion

There is plenty of scope for the New Homes Ombudsman to provide an effective service in relation to residential defects. One of the problems that the government has identified with the existing contractual and statutory framework is that purchasers do not always have the right information to know the best party to approach with a complaint, or to negotiate effectively. With the stated aim of upholding housebuilding standards, the ombudsman is likely to offer many purchasers an alternative, less complicated and more cost-effective route to obtaining redress. 

Mark Lawrence is a partner, and Richard Alam and Zoe Carter are solicitors, in the construction and engineering group at Macfarlanes.