When will the blockage on mortgage valuations for flats end?

“It’s distressing. We are first-time homeowners and to be saddled with unsellable and therefore worthless properties is very upsetting,” Ola Zaid told the BBC this week.

Nearly five years on from the blaze at Grenfell Tower that killed 72 people, the issues around the safety of tower blocks – including which blocks need fixing and who should pay – continue to rumble on.

Thousands of homeowners, like Ms Zaid, remain effectively trapped in a position where they cannot get their flats valued and therefore sold or mortgaged.

Michael Gove this week announced the long-awaited withdrawal of the government’s Consolidated Advice Note (CAN). This has been seen as the driving force behind lenders requiring external wall fire assessments – recorded through External Wall Systems (EWS1) forms – on medium-rise blocks of flats before issuing mortgages. It meant many occupiers were unable to sell.

Instead the housing secretary announced new, proportionate guidance for assessors, developed by the British Standards Institution (BSI) which he hopes will reduce the EWS1 blockage.

“Lenders to whom I have spoken have given our proposals a fair wind so far, but obviously engagement needs to continue,” Gove said.

But what happens now? After speaking to several of the largest mortgage lenders and being briefed by experts, here is a sense of where we may be heading.

The story so far

Before we get into that, however, it may be useful to re-cap what has happened over the past few years.

Following Grenfell, there was a dawning realisation that many flats in tower blocks could have unknown fire-risks or remediation costs. “There was concern that flats in high-rise blocks wouldn’t represent good security and that owners could be liable for remediation costs.”, a House of Commons library paper said.

Sales of flats plummeted as valuers and lenders concluded that flats could not be valued without further investigation. The government’s advice note 14, which advised owners to check “general fire precautions” and ensure that external wall systems were “safe” was seen as not particularly helpful.

This note, described by one sector figure as “binary”, led the Royal Institution of Chartered Surveyors (RICS) to establish a cross-industry working group to develop a standardised process for valuing tower blocks. The EWS1 process, unveiled in December 2019, was described by the RICS as an “industry-wide valuation process which will help people buy and sell homes and re-mortgage in buildings above 18 metres”.

The forms would be used to collect a wider range of information than the previous advice note.

Trouble emerged within weeks, however, when the government, keen to alleviate concerns over problems with the selling of flats, published its CAN, which was widely interepreted as recommending the use of EWS1 on all residential blocks.

It later revised this to stress that the forms should only be used on those blocks with cladding, but concerns persisted that lenders were asking for the forms too widely. A shortage of assessors was also seen to hamper the process.

The latter prompted the government to pour £700,000 into a fund for the RICS to train more assessors from January last year.

Keen to appear to have the problem under control, then housing secretary Robert Jenrick announced last July that EWS1 forms should no longer be required on blocks below 18m in height.

Lenders however, bound by regulatory duties and anxious not to lend to people who may later incur a huge cladding bill, said they needed more information before changing their approach.

Specifically, several of the largest lenders said at the time that they would wait for changes to the RICS guidance and the government’s promised removal of the CAN before altering their lending practices.

However the RICS announced in December that it was not going to change its valuation guidance, saying it should stay in place to “safeguard the public interest”. It made the observation that costs should not be passed on unwittingly to purchasers.

Ministers did not see it this way, with the Department for Levelling Up, Housing & Communities (DLUHC) saying that the RICS should work “harder” to protect leaseholders.

Following the row, Gove this week managed to threaten legislation to order independent governance reviews of the RICS while at the same time saying that negotiations with the body were now on a “positive footing.”

The government finally removed its CAN, while on Wednesday the BSI published PAS9980 – guidance intended to provide a more proportionate system for assessing external walls.

While the RICS has not changed its valuation guidance, it has not ruled out doing so in the future. It has also called for a proportionate approach and ensured that its training for assessors contains content from PAS9980.

So now the CAN has gone and amid “positive” discussions with the RICS (let’s ignore Gove’s legislation threat for now), what is to stop changes to lending practices?

What happens now?

Over the coming days and weeks lenders and valuers will be poring over the mammoth, 174-page PAS9980 guidance.

It is worth pointing out that PAS9980 is technically not a replacement for EWS1, although that is how it has been described by Gove and others and – in a roundabout way – it will be. Or at least ministers hope that it will be.

The PAS9980 sets out a method to conduct and record fire-risk appraisals of external walls, through a five-step risk assessment process to assist in the identification of risk factors. The BSI said: “Not all buildings will require an appraisal and, of those that do, not all will require intrusive inspection. “

The PAS also gives recommendations for the competence of professionals completing such appraisals.

The BSI added: “Where homeowners and building owners are faced with external wall construction which does not meet the expected standards, PAS9980 provides a methodology for assessing the level of safety. It also identifies the proportionate steps that could be taken to better safeguard residents while seeking not to expose them to undue financial burdens.”

Ultimately PAS9980 appears to provide a more proportionate way of assessing risk, although ultimately lenders rely on their valuers and, without updated RICS guidance, the impact may be blunted in the short term.

The RICS has indicated it is open to changing its guidance, saying in its response to Gove’s speech that it “will consider its impact on valuation practice carefully with stakeholders”.

This requirement [for EWS1 forms] will reduce once the relevant parts of the Fire Safety Act are implemented and building owners have started to perform all the relevant safety checks

The more important significance of PAS9980, which is backed by the DLUHC and the Home Office, is that it is primarily designed to support upcoming changes to the Regulatory Reform (Fire Safety Order) through the Fire Safety Act. The DLUHC was not able to say when this will order will take effect but, given the act itself is on the statute book and the PAS9980 is now published, it is not expected to be far off.

The change to the FSO effectively means that for any building with two or more sets of domestic premises, those in control of the premises as the responsible person for fire safety need to undertake assessments of external walls, including cladding systems. The act references the requirement for the responsible person to apply “risk-based guidance”. 

Lenders do not yet know for sure whether PAS9980 will be given the force of law under this order although, given the government’s backing for it, this seems likely.

If it is, the changes to the fire order and the legal backing for PAS9980 should give more comfort for lenders and valuers that fire risks have been accounted for by building owners.

A spokesperson for Nationwide said: “This requirement [for EWS1 forms] will reduce once the relevant parts of the Fire Safety Act are implemented and building owners have started to perform all the relevant safety checks as part of the fire risk assessment.”

He added that the removal of the CAN and publishing of PAS9980 was welcomed by the building society and is the next step on this journey.

The money is key

While much of the media focus has been on EWS1 forms and government guidance, ultimately the main thing lenders will want to know is that borrowers will not be saddled with large, unexpected bills, such as a demand to pay for cladding remediation. Satisfying themselves on this point is a primary regulatory requirement (see box)

For this reason, Gove’s other key announcement on Monday, that leaseholders will not have to pay towards cladding remediation costs on buildings between 11m and 18m in height, will be of huge interest to mortgage lenders.

However it is unclear at this stage what happens if Gove’s plan to persuade developers to contribute to a £4bn fund to cover the work comes unstuck. Will the government step in to fund the work? Will there be a period of delay and uncertainty, extending the misery of those in unsellable properties?

Then there is the question of blocks under 11m.

Paul Broadhead, head of mortgage and housing policy at the BSA, said: “Questions do remain, for example who will pay if cladding does need to be removed from a building under 11m? But the statement gives us greater confidence that these issues will be tackled by the government.”

This view was echoed by Virgin Money UK. A spokesperson said: “There needs to be further discussion on buildings below 11m and we will continue to work with the government and other bodies as they seek to resolve the situation.”

As we have seen, the flat valuation saga is hideously complicated, with many moving parts and multitude regulatory and safety concerns.

As Jenrick found out in the summer, it is certainly not a simple case of a minister announcing something and lenders immediately changing their practices.

The government’s withdrawal of CAN, the RICS’s desire for a proportionate approach, forthcoming legislation and a potential solution to the cladding remediation funding problem should combine over time to gradually resolve the issue. The resolution is a “journey, not an event” as one lending expert said.

But how much comfort that is to those still stuck in potentially unsafe, unsaleable properties in the short term is questionable.