Opportunity lost?

The purpose of this short article is to provide a contrary view to that of the Law Society of Scotland and prominent members of the profession who continue to criticise the introduction of the home report to the Scottish conveyancing market. In particular, I will seek to deal with some of the comments by James Ness, the Society’s Deputy Director of Professional Practice in “Gearing up for change” (Journal, November 2008, 10). I hope to demonstrate that the negative views expressed are grounded on a misunderstanding of fundamental issues of fact and law.

The background

Prior to dealing with the current criticisms, it is important to reflect briefly on the background. The Housing Improvement Task Force was established by the then Labour-Liberal Democrat administration in December 2000 to undertake a comprehensive review of housing policy in relation to the condition of private sector housing in Scotland. Its final report, Stewardship and Responsibility: A Policy Framework for Private Housing in Scotland, is contained at www.scotland. gov.uk/Publications/2003/03/ 16686/19494.

I chaired the sub-group of the Task Force that considered the house buying and selling process. We took over two years to consider proposals for change, and created the concept of the single survey which makes up the backbone of the home report, and for which I am, unashamedly, a fervent supporter.

The cornerstone of our remit was that buyers should have more meaningful information about the property they are purchasing (a principle supported by the Society: Journal, April 2005, 50). This was a specific direction of the Scottish Executive, rooted in the belief that more information was in the interests of the purchasing public. The principal objective of the single survey scheme was not, at its heart, to remove multiple surveys, but rather to ensure delivery of full information to purchasers in the manner most appropriate to the Scottish market.

It is, of course, a very important consequence of the single survey that multiple surveys will disappear, and the much criticised practice of low upset prices will also be tackled. The Task Force commissioned an independent report from DTZ Pieda which demonstrated that many purchasers were encouraged to view properties advertised at low upset values, and incurred costs in valuation with no realistic prospect of purchasing the property.

The DTZ report also noted that purchasers had too little meaningful information (between 90% and 95% commissioned valuation reports, not surveys), and that a large proportion encountered substantial unexpected repairs after purchase. There was considerable evidence that in other jurisdictions the system worked better, and the report also demonstrated that purchasers were prepared to pay a meaningful sum if they could rely upon a substantive single survey report.

Alternative proposals were, of course, considered in detail but not preferred. The utopian proposal the sub-group addressed was: “Is it possible to have a survey commissioned by the seller, independently prepared by the surveyor, which could be issued to all prospective purchasers, with the successful purchaser relying upon the survey report and indemnifying the seller for its cost?”

These results could be achieved in other jurisdictions with success and could be mirrored. The sub-group also noted that the single survey proposals retained at their heart the very central role of the solicitor in the buying and selling process.

“The subject to survey system was better”

As a reaction to some of these criticisms, the profession broadly adopted a “subject to survey” offer system. So was that better? This system provides the purchaser with absolutely no information on the condition of the property he/she intends to buy. Further, he/she is gauging the price based on the knowledge of his/her adviser (who hasn’t seen the property) and their thoughts of the current state of the market. Evidence was given to the single survey implementation team that surveyors were under pressure to ensure that their valuation matched, or at least came close to, the offer price in the buyer’s “subject to survey” offer. The much criticised “low upset prices” environment remained.

This reaction exposed the weaknesses of the system and did not meet the requirements of the then Executive. Meaningful information enables the purchaser to make an informed decision prior to his/her offer in respect of the property. The subject to survey system simply missed the point.

The current arguments against

Over the last six months there has been voluble criticism of the home report scheme by prominent members of the legal profession. The arguments have rather changed over time. I have previously sought to counter the historical arguments (Journal, September 2005, 46; Greens Property Law, issue 89, August 2007) and do not intend to rehearse these, but briefly I will try to deal with what appear to be the main current criticisms and the concerns mentioned by Mr Ness in the most recent article.

1. “Initially at least, the single survey will simply be a cost to the seller”.

Mr Ness suggests that in an untested system the “safe” approach is not to trust the system, and “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”. This seems to me simply preposterous. As solicitors, we are constantly faced with new challenges and changes, rules and systems. Part of our art is to adapt to change and implement legislation to the benefit and needs of our clients.

I suspect that Mr Ness’s scepticism arises from a view that the single survey is in some way not independent, as it has been commissioned by the seller although will be relied on by the buyer. This is a very old, misinformed and tired argument. My sub-group clearly had at its heart the need to ensure that the reality of the home report and how it would be perceived would absolutely enshrine independence. It was blindingly obvious that buyers would only rely on a home report if it was “independent”.

In the outcome, the successful buyer has a statutory right of redress against the surveyor who prepared the survey, under SI 2008/1889 (Journal, September 2008, 70). Buyers not only have a survey report prepared by a member of a reputable professional body, RICS, but one supported by professional standards and objective obligations underpinned by specific liability. Are we really suggesting that there is a real potential for the individual single survey report to be coloured or untrue? If so, we should stand back and await an action of defamation from the firm of surveyors we so accuse.

The home report provides significant and material information about the home of purchase. As a profession, we seem to have been historically content that up to 95% of buyers of domestic property didn’t even have a survey but only a valuation. The further suggestion that buyers should commission their own survey rather than rely on the substantive home report is at best wasteful. In a recent letter I was asked by a leading member of the profession: “Would you rely upon the home report and not instruct your own survey?” My answer was an honest, unequivocal yes.

2. “There remains an innate conflict of interest”

In several other jurisdictions where the single survey system works well, conflict of interest is not a difficulty, and it will not be here. The professional protocols surrounding the preparation of a single survey will obviate any accusation, real or perceived, of conflict of interest.

3. Increased costs

Much has been made of the significant increased cost to the seller. In November the Scottish Law Agents Society (SLAS), who opposed the introduction of the home report, claimed that reports would cost anywhere from £500 to £800 for a seller. In fact, already the cost is as little as £300 for property at values under £200,000 (significantly more than the average price in Scotland). There will be initial increased cost to the seller, but not to the buyer, and not at the levels suggested by opponents of the scheme. However, as we are now seeing, competition will drive down costs significantly. Schemes have also been developed to enable sellers to defer payment.

It should be remembered too that the original concept was that the successful buyer would indemnify the seller for the cost of the single survey, as the buyer would derive the benefit. At one level the purchase price should reflect the inclusion of the cost of the home report.

4. “The home report will lead to increased repossessions”

The SLAS also suggested that the home report would somehow lead to increased repossessions. No justification for this accusation was made and indeed there is no evidence to support it. The Government has made, and continues to make, efforts to ensure that repossessions are contained to a minimum. This accusation does not bear any rigour of analysis.

5. “Parallel regulations in England are reported to provide no benefits to buyers or to sellers, and regulations are widely ignored”

This was a criticism by the SLAS in their letter to members on 15 August 2008, as a lobby to “stop compulsory home reports”. This is yet a further misunderstanding of the home report concept. The Task Force makes no comment or reflection on the English system. Indeed, while evidence was taken around what was happening in England, it was considered completely inappropriate for the Scottish market and the home report bears no resemblance to it. There are no parallel regulations.

6. Shelf life of the single survey

Mr Ness explains that the Law Society of Scotland’s guidance is that purchasing clients should be advised in writing not to rely on reports more than 12 weeks old. The legislation provides that the single survey should not be more than 12 weeks old at the time the house is put on the market. The grounding for the Society’s guidance is something of a mystery, but follows an “extensive consultation exercise”. Is this not the domain for surveyors rather than solicitors? Is the reality not that the market will determine what is appropriate? Why impose a hurdle that should be the domain of others? This sort of practice rule, rightly or wrongly, runs the risk of being perceived as a tool to frustrate the home report concept.

7. It is against the consumer interest

A constant criticism by the Society was that the home report system was against the “consumer interest”. At the time of issuing the Task Force report, it was explicitly made clear that solicitors would be placed even more at the heart of domestic conveyancing transactions through the operation of the envisaged home report/single survey. Consumer views expressed in the media are, almost without exception, positive for the system. Further, the consumer bodies, Consumer Focus and Which?, are voluble advocates of the scheme. The ultimate voice of the consumer is our elected MSPs. The former Administration supported the introduction of the home report, as does the current Scottish Government.

8. The home report is having a severe effect upon the property market

Most commentators acknowledge that the lack of mortgage funding is the overarching factor in depressing the housing market. They are also predicting further falls in house values in 2009, with consequent reluctance to move home.

However, these principal issues aside, has the home report had an influence in further depressing the market? No evidence has become available to support this accusation, and indeed estate agents have announced the contrary view that home reports can be a stimulus to the market: in a market with more sellers than buyers, any encouragement to buyers to view and consider property is positive.

The future?

Having had the opportunity to place its members even further at the heart of domestic conveyancing, the Society has taken a stance against the current Government and the previous Administration as an opponent to the introduction of the home report.

I fail to understand how strategically or tactically this continued opposition to the home report system will advance the Society’s position with consumers or other key stakeholders. There is a real likelihood that the home report scheme will be very successful, and if it is, where will that leave the Society as an advocate of members’ and consumer interests?

There is the potential that a unique opportunity to reinforce the solicitor’s role at the heart of domestic conveyancing transactions has been squandered for the wrong reasons.

Views from the trenches

The Journal asked a cross section of solicitors from around the country a few basic questions on the impact to date (end February) of home reports, and got a perhaps surprising spread of responses.

Are home reports putting a brake on new properties coming on the market?

The almost universal view was yes, in respect of those who might have wished to test the market – though some suggested this was actually a good thing at the present time. As respects other sellers:

“This unfairly attacks the most needy”. (Paul Carnan, Blaney Carnan, Glasgow, citing the cases of an elderly client selling to go into a care home, and a forced sale of a holiday home to liquidate assets)

“Unfortunately, we have encountered cases where prospective clients have for one reason or another been unable to fund the cost of a home report, and there is no question that in relation to ‘distressed sale’ situations, the cost can be a significant obstacle to parties getting their house to the market”. (Kenneth Thomson, Thorntons Law LLP, Dundee)

“It is difficult even to get executry properties on [the market] at present. Quoting the home report figure is killing off business”. (Solicitor A, Perthshire)

“No, they are not really putting off clients from marketing their property: we are currently very busy putting properties on”. (Property manager, Perthshire)

“Only clients who have seriously decided to sell their properties, now put their properties on the market”. (Property manager, Perthshire)

Are prospective purchasers more likely to show interest if a home report is available?

“Not an issue – buyers go to view potential homes, not documents”

(Paul Carnan).

“Properties coming onto the market with a home report are generating greater interest levels… This may be partly due to [their being] relatively new on the market, but also being more reasonably priced in comparison to some of the older stock” (Mike Sinclair, Aberdein Considine & Co, Aberdeen).

“We have seen a rapid increase in the number of requests from buyers to view home reports… This may, in part, be influenced by the way GSPC makes home reports available… Nevertheless, it is clear that there is public appetite for home reports, in marked contrast to HIPs in England”. (Mark Hordern, GSPC)

“Home reports have a novelty value for some purchasers… Once all properties have home reports this will wear off” (Chris Hardie, Lindsays, Edinburgh, and Edinburgh Conveyancers Forum)

“[Most recent] experience does tend to indicate… it is an incentive to buyers to move fairly quickly, as they have to hand a report on the condition of the property, and an effective mortgage valuation” (Kenneth Thomson)

Anecdotally there is evidence that home reports with regard to older properties might be putting prospective purchasers off proceeding. Where a prospective purchaser had offered subject to survey and was already fairly attached to a property, they might have been prepared to proceed despite mention of problems in a subsequent survey. In a falling market however a lot of prospective purchasers looking at a home report might disregard these properties out of hand. (Chris Hardie)

“The general opinion [in our office] is that it would make a property more appealing in comparison to [one without a home report]”. (Gary Robertson, Aberdein Considine & Co, Perthshire)

Is it possible to identify a “home report” factor at work in the current low level of market activity?

Most respondents were agreed that the economic situation is the dominant factor and that no particular “home report” factor can be identified.

Other comments received:

It is an issue that the generic valuation report is not universally acceptable to lenders. Offers are having to be made subject to lender approval; purchasers still have to commission a valuation; and this causes delay and possible renegotiation. (Paul Carnan)

“In Inverness we are currently finding that it is taking an additional three weeks to get a property on the market. Rural properties are taking even longer”. (Rhona Simpson, South Forrest, Inverness)

“The administrative process remains relatively cumbersome”. (Mike Sinclair)

“Most agents are continuing to advise their purchaser clients not to rely on the seller’s valuation and recommending an independent valuation be carried out”. (Mike Sinclair)

Offers for properties are still being made subject to survey and valuation, for the comfort to the purchaser of having their own valuation and because they don’t know whether the report will be acceptable to their lender. (Chris Hardie)

“There are signs that lenders are generally happy to accept transcripts derived from home reports provided they are presented in the lender’s desired format”. (Mark Hordern)

“There is no doubt that the new regime has caused significant additional work for solicitors and their estate agency staff… [and] has also led to significant delays [around three weeks] in properties being brought to the market… As all those involved in the process become more used to it, these timescales shall improve”. (Kenneth Thomson)

“I saw one seller’s survey for a repossession the other day which really was quite meaningless. The property was one of the grottiest I have seen for some time yet the condition rating in almost each part of the report was 1.” (Solicitor B, Perthshire)

Consumer research commissioned by the ESPC tested the various documents with members of the public. Overall the perception was a positive one, with the survey being viewed as most relevant but with a hint of caution on whether it could be trusted. In view of this reaction there was a potential that those who did not have a home report would be at a disadvantage. Thus far, this has not proved to be the case as there has been no noticeable difference between the respective levels of sales. (Derek Lithgow, ESPC)

“When the introduction of the reports was first discussed I was filled with dread and negativity, but I have to admit I now see them in a positive light. I don’t think there will be many others sharing my opinion, though!” (Gary Robertson)

“The first time buyer market is dead. People who might otherwise have been in this market are better to rent for two years and manage their existing debts. However if government directed social landlords to buy houses currently on the private market below £120,000, there would be a huge supply of good houses to rent and reduce waiting lists… This would have the added benefit of allowing the current owners to buy upmarket, thus generating five or six new conveyancing transactions for every house sold under this scheme.” (Graeme McCormick, Conveyancing Direct, Glasgow)