Gearing up for change

Well, you tried. A vigorous public campaign, and over 2,000 votes at the Special General Meeting supporting a two-year postponement of home reports, or the single survey element at least, were followed by a letter from the Society to the First Minister himself setting out the profession’s concerns. However, home reports are past the point of no return for their 1 December launch, with any revocation order requiring 40 days’ notice in the Scottish Parliament and the government publicity campaign now well underway.

Indeed the solicitors’ profession appears to have accepted this, and to have transferred its attention to what needs to be done to ensure compliance with the law – and to protect clients’ interests in the new world that awaits.

So says James Ness, the Society’s Deputy Director of Professional Practice, who has led the seminars round the country to help members prepare for the change. The focus now is on the practicalities of the introduction of the home report, so that solicitors, and the other professionals involved, are fully up to speed to make implementation of the new scheme as smooth as possible for their clients.

Concerns of course centre on the single survey, the key feature which the Government insists will provide buyers with more and better information than they have ever had, and solicitors have maintained will leave sellers worse off with little corresponding benefit to the buyer. The two other components of the home report package, the property questionnaire and the energy performance certificate, excite much less controversy.

“It was jokingly said to me that every house in Scotland will be either a D or an E in terms of energy efficiency, so that’s a lot of work to clarify very little”, Ness says of the EPC, which is being introduced as required by EU law. “There’s also a view that nobody who loved a house would fail to buy it just because it had a poor performance, so when you bear in mind that the three important things in the property market are location, location and location it may turn out to be of limited importance in the short term.” However as climate change-related targets become a reality, and awareness rises of the need to make our homes more energy efficient, attitudes may well change.

The property questionnaire element has been promoted by the Society for some time now, and Ness comments that even before he left practice four years ago, some firms including his own used the idea to collect information from clients. He adds that while there have been grumbles about the content of the statutory form, there has been relief that it does not also cover matters such as title burdens and local authority reports.

Safety first

The reasons for solicitors’ concerns over the seller’s survey have been well documented: the upfront cost, the short shelf life, the inability to discuss content with the surveyor, the need to supplement it in order to satisfy a lender.

How then will the market cope with making the survey work? Clients naturally will look for the deferred payment schemes likely to be on offer, but concerns remain over their availability to those least able to afford the outlay – borrowers with little or no equity in their property facing a distress sale.

Then there is the whole question of whether the purchaser will continue to instruct a survey in any event. Ness goes so far as to predict: “What may well happen is that everyone will offer subject to survey, and everyone will get an updated survey, just like they do at the moment. Initially at least, the single survey will simply be cost to the seller.”

There are a number of reasons to believe that this could happen. One is a simple instinct to be wary of an untested new system. As Ness comments, “The safe thing is to get a new report. And solicitors are safety people.” Market conditions could even make sellers more willing to meet the cost, especially if an updating report is relatively inexpensive.

Left on the shelf

And what about shelf life? The legislation states that the report should not be more than 12 weeks old at the time the house is put on the market. The Society’s guidance, on the other hand, is that purchasing clients should be advised in writing not to rely on reports more than 12 weeks old, i.e. when they commit to a transaction, and some solicitors have publicly stated that they will apply an eight week, or even a four week, cut-off. Ness points out that the 12 week guideline followed an extensive consultation exercise, but elaborates:

“What we’re saying is that solicitors should warn all clients not to rely on a survey more than 12 weeks old, but that will vary hugely. A survey that says at the date of inspection, there were early signs of an outbreak of dry rot, and significant ingress of water, I wouldn’t rely on that the following day. But if it said, ‘this a fine house with no problems of any consequence’, what we’re saying is the maximum you would entertain is 12 weeks…. When you say four and eight weeks that some firms are adopting, that is the ultra-cautious attitude, those are the very ones who will advise the purchasing client to get another survey every time.”

Consumer protections

There have been concerns expressed that the purchaser’s right of recourse against the seller’s surveyor is more limited than they currently enjoy against their own. The reason is that the order creating the liability towards the buyer (SI 2008/1889) requires the buyer to have suffered “material loss”, i.e. that the value of the house is “materially lower” than the valuation given, and this appears to require a difference significantly greater than, say the few hundred pounds that may be paid out at present if the surveyor has missed a bit of woodworm that requires treatment.

A further practical difficulty has been raised, of proving that a defect discovered after the buyer has taken entry, should have been observed by the seller’s surveyor perhaps several months earlier, when you add together the period the house is on the market, the time spent concluding missives, the remaining time until entry and whatever time it then takes for the defect to be noticed.

The RICS has given its assurances that buyers will be in the same position as at present, but the Society’s concern relates to the fact that at the moment buyers rely on surveys that are days or even hours old, rather than potentially up to 12 weeks.

Ness adds: “If the client refuses to get another report, it wouldn’t be unreasonable to ask them to sign a letter in which they acknowledge you advised them to do this – of course it is up to the client whether they agree to this – because there is a real possibility they could find themselves at entry with the lender refusing to lend them the money, which is a serious problem at the moment.”

Where the lender comes in

Talking of lenders, the attitude of those represented by the Council of Mortgage Lenders has to date been that they would normally require a valuation they had themselves instructed, in order to preserve their separate right of recourse against the surveyor. This may well have the effect of a purchaser requiring a second report. Recently, however, the RICS has developed the concept of a generic mortgage valuation, to sit alongside the home report and be made available to the seller and all prospective purchasers. From this generic report the surveyor will prepare a valuation report in the format required by individual lenders to prospective purchasers.

While this could on the face of it reduce the need for buyers to seek their own report, it remains CML policy, as their spokesman Kennedy Foster puts it, that individual lenders should be “free to assess their security subjects in whatever manner they consider appropriate”. In line with the Society’s own guidance, Foster expects that lenders will be unwilling to accept a valuation more than three months old. So it appears that in many cases we will not be much further forward.

Foster adds: “The assessment of risk is very much part of the competitive nature of the mortgage market and lenders do have individual policies in this regard depending upon their risk profile. I have little doubt that the lending industry will adjust to the home report and make it work in practice.”

Guidance on the guidance

In our interview James Ness also expanded on the Society’s guidance, reproduced below but with the caveat that, as with the ARTL guidance, it will be kept under review particularly in the early stages as experience of the new system begins to emerge.

“We will change the existing guidance if errors do come to light – if there’s a serious problem then this might have to be immediate, but we have to see how things are working in practice and make any necessary alterations in the light of experience.”

Importantly, sellers should be advised – the guidance stipulates in writing – on their possible liability for misstatements in the property questionnaire. “Clients who don’t know should say that they don’t know, rather than take a guess at it”, Ness cautions. “You can also see why the Society has said that we do not recommend that the solicitor should sign it as agent – it’s very personal knowledge.”

He adds in explanation that it’s not like signing missives on behalf of a client, but more akin to the former matrimonial homes affidavit “which even as an attorney we couldn’t sign, because your status as married or not married, you’re the only person in the world who can know that… [similarly] you’re the only person who knows whether you’ve carried out alterations; if they’ve been skilfully done it’s very difficult to see them sometimes”.

Ness is reassured that local trading standards officers, who shared the platform at the Society’s seminars and in whom lies the power to levy fines if the seller fails to comply with the regulations, mostly thought it reasonable that the client had to accept liability for such information. He hopes that this will become the accepted view.

Another point on which trading standards took a view, this time with unanimity, and in line with the Society, is when a house can be said to have been “withdrawn” from the market (and thus require a new home report if remarketed after more than four weeks). A house shown as “under offer” is not withdrawn, though a change of agent might be necessary if a further offer is entertained, due to the gazumping and gazundering guidelines. But it seems this information need only be displayed in one location, rather than any place the house was previously marketed.

Related to the seller’s liability point is the recommendation that the home report is not annexed to an offer to purchase. If sellers think the questionnaire may end up as part of the contract, the most frequently used answer might be “Don’t know”, or “Not in a position to answer”, thus undermining the whole exercise. Further, as anyone authorised by the seller can sign the questionnaire, other messy situations of liability could arise; and Ness suspects that surveyors would protest at the risk of liability under a contract to which they are not party.

Points of conflict

Possibly a bigger issue is the potential conflict of interest, which prompted correspondence to the Journal on the then draft guidance (August, 72). As it remains commonplace in smaller towns for firms to represent both buyer and seller under the “existing client” exemption to the Conflict of Interest Rules (relatively few claims arise, says Ness, because the firm knows it has to fix it if something goes wrong), there has been concern over the proposals that now appear, after modifications following comments on the draft, as paras 14 and 15 of the guidelines.

There is however an acceptance that the rules should be given a fair trial. As Ness puts it, “Even those who were vociferous have accepted my view that to ignore the guidance from day one, when you have no measure of the risk, is dangerous. So they’re likely to follow the guidance for a couple of months until they’ve got a feel for the issues.”

This approach of keeping options open, and being ready to jump, appears to characterise the profession’s attitude on a wider front – sensibly enough until we see what emerges. James Ness thinks, for instance, that many firms have registered with several major suppliers of the reports – the Society’s scheme included – so they can move seamlessly from one to the other as the various pricing strategies emerge.

Next steps

The Society’s work will also continue. As well as amending the guidance in the light of experience, the Society will be pressing the Scottish Government for an early review of the scheme. Given the low level of activity in the market, and the large residue of transactions that will not require a home report, a six-month interval might be appropriate. It may mean having to bring pressure to bear on the Government all over again, just to hold the review. But at least solicitors will then be able to speak from experience.

Useful websites

The Law Society of Scotland: www.lawscot.org.uk

Royal Institute of Chartered Surveyors (RICS): http://www.rics.org/Networks/Regions/UK/Scotland/homereport_guidebuyerssellersscot_031108.htm

Home reports: www.scotland.gov.uk/Topics/Built-Environment/Housing/BuyingSelling/Home-Report

Your starter for 15

The Law Society of Scotland has published the following guidance on home reports as at September 2008. The guidance is likely to be revised in fairly early course in the light of experience (see article). To check the up-to-date version see www.lawscot.org.uk/Members_Information/convey_essens/ homereports/hrguidance.aspx

Lifespan of reports

1. Members should intimate to purchasing clients in writing that they should not rely upon reports more than 12 weeks old.

2. Members should intimate to selling clients the Society’s guidance in relation to purchasing clients so that they might consider the appropriateness of updating reports from time to time.

Making reports available to “interested parties”

3. Parties who have formally “noted an interest” through solicitors or licensed conveyancers should be deemed to “have sufficient means to buy the house” and/or be “genuinely interested”.

4. Members should ensure that they ask sellers if there are any persons to whom the seller would not be prepared to sell the house prior to marketing property, to avoid any difficulties.

Liability for information contained in property questionnaire

5. Members should ensure that they have advised sellers in writing of their obligations in regard to the preparation of the property questionnaire and the importance of accurately and truthfully answering those questions, including clarifying for the client possible liability both in terms of the Property Misdescriptions Act 1991, the Housing (Scotland) Act 2006 and the Housing (Scotland) Act 2006 (Prescribed Documents) Regulations 2008 [SSI 2008/76].

6. Members should make clear to selling clients completing such questionnaires that primary responsibility for the accuracy and truthfulness of those questionnaires rests with the client, and that the member’s only obligation in terms of compliance is to ensure that the copy which they offer members of the public who are purchasers is effectively a true copy of that form and therefore “authentic” in terms of the legislation and regulation.

7. The Society take the view that members do not have an obligation to check the information contained in the property questionnaire and may accept the statements therein at face value, except in circumstances where they are personally aware that the statement is untrue. (For example in a situation where the member or their firm carried out the remortgage in respect of a substantial extension to the property and the questionnaire states that there are no alterations.)

Who can complete the property questionnaire?

8. Ideally the questionnaire should be signed by at least one principal owner acting under authority from any co-proprietors.

9. In the view of the Society “authorised persons” (for the purposes of reg 5(2) [of the 2008 Regulations]) definitely includes those acting under a power of attorney, deed of trust, court order, solicitors and duly authorised officers of a company, but may include others with a similar level of formal authority. Care should be taken in cases where only informal authority is available. In the interests of risk management the Society does not recommend that solicitors sign questionnaires on behalf of clients.

Deferred payment arrangements

10. Terms of business should state or should include a separate covering document in relation to:

(a) the price to be paid for the home report;

(b) a clear statement of any financial interest the selling agent has in the home report provider;

(c) details of any deferred payment option including any discount for early payment and charges in relation to property where the sale does not proceed or the property is withdrawn;

(d) where a mandate is to be signed for payment, a clear statement of the meaning and effect of such a mandate.

Withdrawn from the market

11. In the view of the Society a property is not “sold” until a bargain is concluded. Property marked “under offer” is still technically available for sale (admittedly subject to a change of agent in terms of the Society’s Closing Date, Gazumping and Gazundering Guidelines). Accordingly for the purposes of reg 6(2)(b), property marked “under offer” should not be deemed “sold” and it should not be deemed “withdrawn from the market” until there is a concluded bargain. On this basis it is the view of the Society that where a property is marked “under offer” and negotiations fall through, the existing home report could still be used in terms of reg 6(2)(b).

Annexation of the home report to offers

12. While the Society accepts that it is a matter for individual members and their clients, the Society does not recommend annexation of the home report to offers.

Conflict of interest

13. In the interests of transparency, where firms act for both buyer and seller in terms of the existing conflict rules they should clarify the source of the home report and any connection which their firm has with the supplier of the report.

14. Where the selling solicitor is aware that multiple reports have been purchased by or on behalf of the seller in an effort to obtain a report that portrays the property in the best light, the firm should not also represent a purchaser (notwithstanding the fact that an exemption under rule 5 of the Conflict of Interest Rules applies) without disclosing the full circumstances, due to the clear conflict of interest between the parties.

15. Where a purchaser is to be advised to seek an additional independent report in cases where the firm already acts for the seller, the firm should not represent the purchaser due to the clear conflict of interest between the parties. Exemptions under rule 5 of the Solicitors (Scotland) Practice Rules 1986 rely on the fact that the agent will not advise either party in relation to price. It is difficult to see how an additional independent report could be instructed without a discussion in relation to price.