Press reports last week about flat owners in Swansea bringing a multimillion-pound claim against Zurich for defects in their new build property highlight one of the pitfalls of buying a new home. Can buyers rely on the guarantees or warranties meant to protect them from buying a home with structural defects? And what happens when they try to enforce these warranties or guarantees? This article looks at a couple of recent cases concerning these issues and gives some pointers about what buyers should look out for.
When you buy a new home, it should come with some form of structural defects warranty that protects you if anything goes wrong with the property. In our article, ‘The benefits and pitfalls of buying a new build home’, we pointed out that there are several warranty providers but not all are approved by mortgage lenders.
Zurich entered the new homes market in 1993 and typically offered a 10-year warranty against structural defects. It quickly became one of the main players in the industry but to the surprise of many exited the market in 2009.
A group of flat owners at Swansea’s Meridian Quay is now suing Zurich for allegedly issuing “fraudulent” completion documents. They claim that Zurich’s surveyors bypassed the company’s electronic system and issued hand-written cover notes without even inspecting the development.
The development has been plagued with damp and fire safety problems since it was built a decade ago. This has left the flats worthless as banks and building societies will not offer mortgages due to the ongoing problems.
To compound matters for flat owners, Zurich transferred its liabilities under its 10-year warranties to a company called East West, which has since gone into administration.
Phil Lake, the managing director of Meridian Quay Limited, the head leaseholder, claims Zurich has acted “recklessly and fraudulently”. He is hoping to recover £25m from Zurich to cover the costs of the repairs plus £5m for punitive damages. Zurich denies the claims.
Flat owners will take comfort from the result of a recent case against Zurich over similar issues that went to the Court of Appeal, Manchikalapati & Others v Zurich Insurance PLC.
New Lawrence House in Manchester had been described in marketing material as “an outstanding investment opportunity”. Soon after completion, it was found to suffer from significant fire safety defects, and residents had to move out.
Thirty flat owners claimed against Zurich under the structural defects insurance policies it issued on completion and won in the Technology and Construction Court. Although His Honour Judge Davies found in favour of the claimants, he said they were only entitled to recover £3.6m rather than the total costs of the remedial works of £9.7m. This was due to the policy’s maximum liability clause, which limited the amount the claimants could recover to the purchase price of their flats.
Lord Justice Coulson said “it becomes impossible to see any circumstances in which [the insurers] would every pay out under the terms of the policy”.
The claimants appealed to the Court of Appeal, which again found in their favour. The court also said the claimants could claim the maximum sum in respect of all 104 flats in the development, not just the 30 flats owned by the claimants. As a result, £10.8m was awarded to the claimants.
In his judgment, Lord Justice Coulson was critical of the interpretation the insurers had tried to put on the policy wording. He described it as “… a strained and artificial construction… with the result that it becomes impossible to see any circumstances in which [the insurers] would every pay out under the terms of the policy”.
These cases highlight how important it is for buyers of new homes to obtain a structural defects warranty or guarantee they can rely on.
The three main providers of new home warranties are now the National House-Building Council (NHBC), Local Authority Building Control Warranty (LABC) and Premier Guarantee. Between them, they cover about 80% of the market. All three operate under the Consumer Code for Home Builders.
Regardless of who issues the warranty, it is vital to check the small print to see what it covers. You should also ascertain the excess, as some warranties require the buyer to pay the first £1,000 of any claim. Finally, make sure your solicitor checks that the warranty offered satisfies the requirement of your lender (if you have one).
If you have any queries about buying a new home or a new homes warranty or guarantee, please contact us now.