What stands out in the judgment is the lengths to which Zurich was prepared to go to avoid paying out
Housebuilder Persimmon told its customers last year that buying a new property was “less stressful than buying a second-hand home”. That was before a Channel 4 investigation into one of its new homes found 295 faults including a fire door that didn’t close, leaking sinks, showers that weren’t sealed and faulty waste connections.
This is not unusual. A report by housing charity Shelter a couple of years ago revealed that more than half of buyers of new build homes in England have had significant problems with construction, unfinished fittings and faults with utilities.
10-year insurance backed warranty
Buyers of new homes usually take comfort from the fact that UK Finance (previously the Council of Mortgage Lenders) requires all new homes to come with a 10-year insurance backed warranty. The warranty is taken out by the developer to protect the buyer against:
- the developer becoming insolvent before completion – in which case the buyer’s deposit is protected
- defects in the construction, such as leaking windows or the heating not working due to faulty pipes, that come to light in the first two years after completion
- major problems with the structure of the home including foundations, the external render, roofs, ceilings, chimneys and load-bearing parts of the floors that come to light between three and 10 years after completion.
There are currently three main providers of warranties, the National House Building Council (NHBC), Local Authority Building Control Warranty (LABC) and Premier Guarantee. NHBC is the most common, with around 80% of the new homes market. Despite its pre-eminent position in the market, NHBC has not been without controversy. An article in the Guardian in 2017 questioned its independence after exposing the fact that it was paying up to £15m a year to leading housebuilders through a form of profit share agreement.
Court of Appeal case
One of the previous providers of insurance-backed warranties was Zurich, which was involved in the recent Court of Appeal decision. The case of Manchikalapati & others v Zurich Insurance PLC and East West Insurance Company LTD concerned two blocks of flats in Manchester in which there were severe building defects. Claims were made by the freeholder and some of the flat owners against Zurich under the warranties they had given.
The claim was brought in the Technology and Construction Court. The court found that the buildings’ structural steelwork lacked fire protection, which was a defect covered under the policy. The cost of fireproofing was £4.7m, but Zurich successfully argued that the maximum liability cap under the policy was £3.6m. The claimants appealed to the Court of Appeal, which found in their favour. It decided that Zurich’s liability was not limited to £3.6m but was for up to £10.8m, which was the total price of all the flats.
The case involved several other issues and what stands out in the judgment is the lengths to which Zurich was prepared to go to avoid paying out. The Court of Appeal judges were highly critical of Zurich. Lord Justice Coulson noted that Zurich was trying to exclude cover under a policy that was “ostensibly designed to respond to the very events which have in fact occurred”. He also said that if Zurich’s arguments were adopted “it becomes impossible to see any circumstances in which Zurich would ever pay out under the terms of the policy”.
Where does this leave buyers of new homes?
The Home Owners Alliance is a campaign group that champions the interests of Britain’s homeowners. It is campaigning for the introduction of a snagging retention policy for new build developers. This would involve home buyers keeping back a percentage of the purchase price for their home until they are satisfied snagging items have been dealt with.
This is an excellent idea. It would give homeowners time for an independent inspection and incentivise builders to build properly in the first place, plus fix problems quickly where they don’t. The Home Owners Alliance suggests a snagging retention of between 2.5% and 5% of the purchase price.
Carry out a survey
I advise buyers should go further and carry out a building survey of the property before they complete. This is especially important if you are buying from a smaller builder. When you bear in mind the real peace of mind this will give you, plus the fact that most warranties have an excess for claims of around £1,000 or more, this makes perfect sense.
I should point out that many housebuilders explicitly state in the sale contract that inspections and surveys are not allowed before completion. The Homes Owners Alliance is campaigning for a mandatory right to inspect before completion to defeat this practice. In the meantime, the important thing is to ensure that this right is inserted into your purchase contract if you buy a new home.
Obviously, if the construction of the property is sufficiently advanced at the relevant time, such survey should initially be carried out prior to exchange of contracts.
If you have any queries regarding buying a new home, please contact me by email at MRG@portner.co.uk.