New build: getting the loan funds

On 30 August 2004, the Council of Mortgage Lenders (CML) will amend the Lenders’ Handbook requirements relating to newly built properties.

The CML is the representative trade association for mortgage lenders in the UK and its members undertake around 98% of UK residential mortgage lending. The Lenders’ Handbook provides comprehensive instructions for conveyancers acting on behalf of lenders in residential conveyancing transactions.

The aim of the amendment is to reduce the risk of borrowers moving into unfinished new build properties. While statutory safeguards under the Building (Scotland) Act 1959 protect homeowners from major ‘health and safety’ related faults, properties can suffer from a catalogue of other faults. These faults are nonetheless inconvenient for the borrower and may also impact on the value of the lender’s security.

The CML has discussed the amendment with the Law Society of Scotland, Homes for Scotland, Scottish Association of Building Standards Managers, Scottish Executive Building Standards Division, NHBC, Zurich and Premier Guarantee. This article sets out the background to the change and the agreed way forward.

Why the problem?

Lenders’ requirements with regard to newly built properties are set out in sections 5.3 (Planning and Building Regulations) and 6.6 (New Properties) of the Lenders’ Handbook. Under section 6.6, the conveyancer must ensure that newly built properties are built under a new home warranty scheme (such as NHBC cover) or the CML Professional Consultant Certificate. However, although a property may have been built in terms of a new home warranty scheme, to get warranty cover the property must pass a final/pre-handover inspection by the warranty provider. If the property fails its inspection, the warranty provider may refuse to give cover. Unfortunately, many final/pre-handover inspections do not take place until after settlement. Where settlement occurs before the inspection, there is a risk that the borrowers will move into an unfinished property. This can result in months of inconvenience for borrowers as they try to negotiate with builders to rectify outstanding problems. The solution is to ensure that settlement cannot occur unless the property passes a final inspection.

The cover note

With effect from 30 August 2004, lenders will not release the mortgage funds for a new build property unless the borrower’s conveyancer has received confirmation, in the form of a cover note, that the warranty provider has carried out a final/pre-handover inspection of the property and that a warranty will be provided. In practice, the warranty provider will give the cover note to the builder on the day that the property passes its final/pre-handover inspection. The builder or the builder’s conveyancer will then forward the cover note to the borrower’s conveyancer (a faxed copy of the cover note would be acceptable). The borrower’s conveyancer would not be permitted to send the certificate of title and request the mortgage funds without having first received the cover note. Examples of new home warranty providers’ cover notes are available on the CML website (www.cml.org.uk/handbook). This revised approach will apply to all transactions involving new properties being built or converted in accordance with a new home warranty scheme and where conclusion of missives occurs on or after 30 August 2004. It will therefore not apply to transactions where settlement takes place after 30 August 2004 and conclusion of missives occurred before that date. It will also not apply to self-build schemes or where the construction or conversion of a new property is supervised by a professional consultant without a new home warranty scheme.

The Handbook as revised

On 30 August 2004, the CML will amend 6.6.2 of the Lenders’ Handbook to read:

“Before you send the certificate of title, you must obtain a copy of a new home warranty provider’s cover note from the developer. The cover note must confirm that the warranty provider has carried out a final/pre-handover inspection and that the new home warranty will be provided. This will only apply where conclusion of missives occurs on or after 30 August 2004. This does not apply to self-build schemes. Check Part 2 to see what new home warranty documentation should be sent to us after settlement.”

Warranty providers’ guidance

NHBC, Zurich and Premier Guarantee have indicated that they will have all necessary procedures in place before the date of implementation. They have produced guidance for builders on inspection standards, so that builders will only apply for a final/pre-handover inspection once all the standards have been met. This should reduce the risk of delay caused by calling for an inspection too soon, failing and then having to agree another inspection date.

Missives to revise

Developers will need to review and update their missives. They will need to bear in mind when formulating clauses relating to the settlement date that:

the conveyancer will be unable to submit the certificate of title until he has received the cover note; and the lender will have a minimum notice period of five working days for the release of mortgage funds after receipt of the certificate of title.

Building Act still rules

It is important to note that new build properties must also comply with statutory requirements under the Building (Scotland) Act 1959. The arrangements for completion certificates/temporary habitation certificates will be unaffected by the introduction of the cover note procedure. For more information on statutory requirements please visit the Scottish Association of Building Standards Managers website (www.sabsm.co.uk).

The cover note procedure is a significant change in approach to improve standards and all parties are working together to achieve smooth implementation.

Andrew Hopkins, Policy Adviser, Council of Mortgage Lenders
e: andrew.hopkins@cml.org.uk