Cracking the code: Dealing with defective housing

When you accept delivery of a brand-new car, you don’t expect sticky brakes or the engine to constantly misfire. If it’s faulty, you’ll take it back. If the problems are interminable or calamitous, consumer rights may entitle you to a refund.

When it comes to the biggest purchase of your life, however, things are more complicated. A defective dwelling causes frustration and disappointment, at best. At worst, it threatens occupiers’ safety and wellbeing and is unsaleable.

The new legislation would make it compulsory for housebuilders to enrol in a New Homes Ombudsman scheme in order to develop and sell property directly to a consumer

In August, the HomeOwners Alliance found that the fastest-rising concern among respondents was the quality of homes. For older properties, prospective buyers can spot tangible faults through inspections and enquiries. Sadly, this is not feasible for those purchasing off-plan. As the rate of housebuilding climbs, this could well lead to a decline in construction quality. 

With ombudsmen long having heard property grievances in other areas, it’s unsurprising that the concept has appeal in the area of new homes. An all-party parliamentary group (APPG) has been lobbying for an independent ombudsman scheme to be established that would adjudicate on disputes between owners and housebuilders. Last October the then housing minister announced at the Conservative Party conference government plans for a redress scheme through a single New Homes Ombudsman.

Any financial award would be subject to a cap; the government takes the view that more severe claims should be pursued through the courts

The Ministry of Housing, Communities and Local Government (MHCLG) recently sought views on the proposals. While much detail remains to be confirmed and fine-tuned, the consultation revealed key principles as to how the process is likely to work, with many of these echoing the APPG’s recommendations.

The new legislation would make it compulsory for housebuilders to enrol in a New Homes Ombudsman scheme in order to develop and sell property directly to a consumer. It is acknowledged within the consultation document that there would be a delay before the laws could be considered and passed. Consequently, the government has set out a number of non-statutory measures to push reform in the interim. These include disqualifying housebuilders from the next edition of Help to Buy if they do not join the ombudsman scheme, effectively ensuring that major housebuilders sign up quickly. 

It is imperative to its role as arbiter that the ombudsman should have clear frames of reference to reach decisions. The APPG suggested that this could be achieved by introducing a mandatory single code of practice – at present there are several, which all have different requirements, and housing developers invariably adopt whichever one is associated with its home warranty provider. In the intervening period, the MHCLG envisages working with consumer groups and industry to develop a new voluntary code intended to iron out inconsistencies between existing alternatives. A unitary policy also prevents housebuilders from “code shopping”.

The ombudsman scheme would be funded by a levy on developers, thus eliminating one of the criticisms of existing codes, which is that they require complainants to pay administration fees. 

Once the new ombudsman became operational homeowners would have to exhaust the internal complaints process of their housebuilder or home warranty provider before they could access it. The MHCLG is still assessing whether limited exceptions to this rule should apply, for instance in the case of severe defects. It’s unclear whether there would be an absolute long-stop for the time period during which the homeowner could make referrals to the ombudsman. The APPG suggested this should be a period of two years from handover, which mirrors the defects liability period under a home warranty.

The ombudsman would be able to make various awards, including an apology, an explanation of what went wrong, rectification, a financial award or a combination of these. Any financial award would be subject to a cap; the government takes the view that more severe claims should be pursued through the courts. Equally, overlap would need to be avoided with other ombudsmen and home warranty schemes, such as NHBC. Accordingly, allegations of non-compliance with Building Regulations would rest outside of the New Homes Ombudsman’s jurisdiction.

An ombudsman is a pragmatic solution since it grants homeowners not only peace of mind but a defined procedure to follow. Importantly, it lacks the complexity of possible statutory alternatives such as retention funds or creating new duties of care. For what lurks in the background is the government’s desire to balance homeowners’ rights against red tape for housebuilders. Its goal of building 300,000 new homes by the mid-2020s remains ambitious. To achieve that, it needs to create an environment that rebuilds public trust without halting productivity. Like so many other things, it’s a fine line.

Francis Ho is a partner at Penningtons Manches Cooper