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Your Home, Your Risk: Why Legal Contracts Matter on Renovations
What value do you place on your home?
Your home is one of the largest investments you will make. In almost all cases, it is your most important asset not just because of its capital value, but because it’s your home and hopefully a sanctuary. Yet so many of us neglect its importance when arranging for works to be undertaken to it.
It is exciting to be improving or extending your home. However, without proper planning and legal safeguards, home improvement projects very often spiral into dispute, financial loss, and even damage to your most valuable asset.
How can you protect yourself?
- Contractor selection – Select your contractors and professionals very carefully.
- Defined works – Be very clear about what is and what is not included.
- Insurance – Make sure the contractor is adequately insured.
- Contract – Have the contractors and advisers enter into a formal contract.
Selecting a Contractor
Just a few of the many considerations include:
- Where possible, obtaining a personal recommendation, and attending previous jobs and speak to the contractor’s client;
- Checking the contractor’s financial solvency; and
- Ensuring the contractor is adequately insured.
Defining the Works
Make sure that all the works you are instructing to be carried out are clearly defined, and that you specify to what standard these must be completed.
Insuring the Works
Even on small jobs, things can do drastically wrong – a nail through the wrong wall could mean a pipe bursting and flooding your home and any adjoining properties, or faulty wiring could result in fire damage to your property and contents. Standard home insurance will not cover any ongoing works, and you should ensure that your contractor (a) is adequately insured to cover these risks and (b) takes responsibility for such damage by means of a formal contract.
A Formal Contract
The best step you can take to protect yourself is put a proper building contract in place at the outset. A well-drafted contract does more than just describe the works to be carried out – it manages your risk, defines responsibilities, and provides legal recourse if something goes wrong.
Many homeowners assume that standard or unamended forms of agreement offer sufficient protection. In reality, these agreements are inherently contractor-friendly and leave homeowners exposed.
Why do you need a contract?
Without appropriate contractual protection, you may be exposed to serious risks which can affect your ability to live in, sell, or borrow against your home. For example:
1. Defective works
Statutory construction obligations are unlikely to protect you from the full extent of any damage and financial losses you might suffer as a result of poor workmanship. And even where they do, contractors routinely seek to limit your ability to recover losses by inserting onerous limitation clauses into construction forms. Even where you believe you are “covered,” you may find you cannot recoup your losses in practice.
2. Legal and Regulatory Consequences
If works are completed without the necessary approvals or certificates (e.g. building control sign-off or listed building consent), you may be in breach of legal obligations or planning conditions. Standard forms of contract tend to place the burden of complying with these on you, rather than on the contractor. This can cause problems years down the line. Solicitors acting for prospective buyers will raise enquiries about the works, and any gaps in paperwork will come to light.
3. Impact on Property Value and Mortgageability
Failure to complete your project in compliance with your mortgage terms could reduce a valuation of your home – or worse, lose you your mortgage. Mortgage lenders can refuse to lend against properties with unresolved building issues or works which have not been signed off. If you need to refinance or a buyer needs a mortgage, the transaction could fall through.
4. Inadequate Insurance and Uninsured Works
Standard, unamended building contracts often contain minimal insurance provisions, offering little or no protection against professional negligence, leaving you exposed if things go wrong. The risks of professional negligence are real and potentially devastating, as seen in tragic cases like Grenfell Tower.
Your home insurance should be carefully considered to establish if it covers the works, but worse, could also be in jeopardy. Many homeowners are also unaware that their standard buildings insurance policy will almost certainly not cover construction works, and that these need to be insured separately. Failure to notify your insurers or ensure the works are completed in accordance with their requirements could also invalidate your cover.
Your contract, if well drafted, can provide critical protection, allowing you to recover losses arising from negligent or defective works for up to 12 years after completion.
5. Breaching your Leasehold Terms
Leaseholders face heightened risk, as they must comply not only with general legal obligations but also with general legal obligations but also with the specific terms of their lease. Unauthorised works can amount to a breach, exposing the leaseholder to enforcement action or even forfeiture.
Even when works are authorised, problems can arise if the building contract doesn’t require the contractor to comply with the terms of the lease or any licence for alterations. Breach of those terms, however inadvertent, remains the leaseholder’s responsibility. Crucially, you are unlikely to recover losses from the contractor, who is not bound by your lease or licence as they are not a party to that agreement.
Get in touch with our Construction Team
Our specialist Construction Team is experienced in identifying and addressing risks before problems arise. We offer cost-effective, tailored contracts that help safeguard your home and your finances, giving you peace of mind.
Making this small investment now could save you significant time, stress, and expense later – potentially avoiding costly litigation. Get in touch to find out how we can help.
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Issues to Consider When Obtaining Construction Finance
The general concept of ‘real estate finance’ can cover loans to assist a borrower with the acquisition of a property (whether residential or commercial) or refinancing an existing loan secured against the borrower’s property, loans for the borrower’s business purposes that are secured against property that it owns and loans for the development or construction of property.
Legal Steps and Obligations for Borrowing Against an Existing Property
Borrowing against an existing property (that has already been built) will, in broad terms, follow standard(ish) legal steps with which many homeowners are familiar, to provide security to a lender. Generally, there will be some form of loan agreement that imposes on the borrower certain financial obligations (i.e. obligations to pay interest and repay the loan sum that was lent) and property obligations (to take steps to maintain the value of the property throughout the duration of the loan agreement, e.g. by requiring the borrower to keep the property in repair, to insure the property, not to cause or permit damage to be caused to the property etc.) and the borrower will be required to enter into documents to provide security in favour of the lender (usually a first legal charge/mortgage over the property and sometimes guarantees in favour of the lender). Development Finance can differ from these more familiar real estate finance methods and additional legal steps and documents may be required.
How Is Development Finance Different From a Standard Loan Secured Against Property?
‘Development finance’ or ‘construction finance’ involves a lender providing a loan to a borrower for it to develop (i.e. build, extend, renovate or refurbish) a property. It can form part of a loan that is made to also acquire the property that will be developed. The loan is secured against the property (as with other forms of real estate finance) but security will also be given over the developer’s (i.e. the borrower’s) rights under relevant construction documents – e.g. security over rights of the borrower/landowner under the contract with its building contractor to carry out the development and overs its rights under services agreements with other professionals such as the architects and engineers for the construction project – as well as security over the borrower’s rights to proceeds of insurance policies relating to the property and the construction project itself.
Comprehensive Due Diligence Requirements for Lenders In Property Development Projects
A prudent lender will usually insist on a full due diligence review not only of the property which is being provided as security, but also a full review of the planned development and all construction contracts and the contractors themselves before funding is released to the borrower. The lender will want to review:
- the value of the property itself, which will be lower while the construction project is being carried out compared to what its value will be when the development has been completed. On a development project that will involve the sale or lease of units on a development (e.g. building a block of apartments), a lender will want to have a clear picture of (and certain controls in respect of) agreements for leases or sales of units that are in place and will be put in place;
- the experience and skill of the project team (e.g. main building contractor and associated professionals – e.g. architects, structural engineers and other members of the design team) and what levels of professional indemnity insurance they have in place to cover any defects that may arise in their design (and in the case of the main contractor, whether they have sufficient cover to protect against the possible insolvency of any subcontractors or consultants);
- the costs to complete the design, build and sale of the development (which, together with funding costs, should not exceed the value of the completed development) – often a lender will require its own ‘monitoring surveyor’ or ‘quantity surveyor’ to review the budgets or, as a minimum, they will arrange for their own professionals to ‘sense-check’ the costings;
- what rights the lender will have if the borrower/developer is unable to complete the development, such that the lender must ‘step in’ and take over the construction project to get it completed.
Conditions Precedent for Standard Real Estate Loans
Lenders of ‘standard’ real estate loans (that do not involve construction elements) normally impose numerous conditions precedent (known as ‘CP’s) such as requiring satisfactory reviews of the property title documents, insurance, appropriate consents and authorisations and planning permissions etc. These CPs must be satisfied by the borrower before the lender will make any funds available to the borrower.
Conditions Precedent For Construction and Development Loans
The list of CPs for a construction loan/development loan will include all of these ‘usual’ conditions and impose numerous further construction specific conditions, such as requiring sight of signed building contracts, professional appointments, professional indemnity insurance documents and collateral warranties, as well as detailed budgets that have been approved by the lender’s representatives.
It may be that the construction loan will be released in separate tranches when certain phases of the development have been reached, and in that case it may be that there will be CPs that need to be satisfied at each stage of the development process, possibly to be signed off at each stage by the lender’s own monitoring surveyor (who would represent the lender, but whose fees must be paid by the borrower).
It is for these reasons that the various documents required for a development loan will be more detailed and complicated and accordingly they take more time to negotiate and finalise between the parties and their lawyers than would be the case for a loan that does not involve construction elements.
Summary
Development finance or construction finance facilities are complex, and the legal processes can take a long time, involving many legal advisors acting for the borrower, the lender and sometimes for the building contractors as well. At Quastels, we have experienced lawyers in our Finance & Banking, Real Estate and Construction departments who work together as a single team to progress matters for our clients (both borrowers and lenders) as swiftly as possible.
To discuss any of the points raised in this article, please contact Jason Greenberg or fill in the form below.
New Homes Warranties and The Building Safety Act
The Building Safety Act 2022 has already brought in substantial regulatory reform with regard to building and fire safety, and continues to alter the property development landscape as sections of the Act are progressively brought into force – frequently with little or no warning.
This article focuses on provisions of the Act relating to New Home Warranties which have yet to actually come into force. These will apply to all newly constructed dwellings, and will make build warranties on these mandatory, and extend these to a minimum of 15 years. These changes will have a substantial impact on developers, housebuilders and insurers alike.
What Buildings Are Affected?
Whilst common in practice and generally a prerequisite to obtaining mortgage finance, new home warranties have not previously been mandated by law. Where provided, these are typically provided for a 10 year period – of which 2 years will be covered by the developer or housebuilder, and the remaining 8 by the policy provider.
Under section 144 of the BSA, any person carrying out a development in England which results in the creation of one or more dwellings will now be obligated to provide a new build warranty to anyone acquiring an interest in the dwelling, for a minimum term of 15 years from the date on which the relevant interest is granted. The extended term reflects the 15-year limitation period envisaged elsewhere in the BSA.
This applies in connection with any building work done that creates a new home, and not just the construction of a new building. So for instance, the conversion of commercial space to residential space would be caught under the regulations.
Once in force, the provisions will apply to any new dwelling sold or transferred from that point onwards. They will not apply retrospectively, meaning that warranties granted before that date will not need to be extended.
What Will The New Warranties Need To Cover?
A new build warranty is defined under section 144 as an arrangement by which:
- the developer agrees, in specified circumstances, to remedy either specified defects or any defect in the dwelling that occurs within a specified period following completion of the build, and
- a prescribed person obtains the benefit of a policy covering either specified defects or any defects in the build.
The Act also grants the Secretary of State powers to impose minimum requirements for such warranties by regulation. These are likely to include requirements as to the solvency of any insurer or underwriter, the assignability of the warranty, what defects must be specified, what levels of cover must be provided and even maximum amounts for any excess – but these details have yet to be confirmed. Whether the developer’s specified period of liability will be extended also remains to be seen.
What Are The Penalties For Failing To Comply?
Once in force, it will be unlawful for developers of a new build home to sell it without providing a 15 year warranty, failing which penalties will apply. The Secretary of State will set out the exact level of financial penalties that could be levied.
At present, section 145 provides that the maximum level of any penalty set will not exceed £10,000 or 10% of the sale price (whichever is the greater). The legislation also states that developers who have a “reasonable excuse” for failing to take out the warranty may not have to pay a fine. What constitutes a “reasonable excuse” has not yet been defined.
Interestingly, the standard of proof to which developers will be held in evidencing that they have a “reasonable excuse” will be the criminal standard – they will have to demonstrate this beyond reasonable doubt.
When Are The Provisions Likely To Come Into Force?
The government has stated that it intends to consult widely on the proposed minimum standards, and that it intends to delay commencement of section 144 to allow industry the opportunity to consider the outcome of that consultation. The relevant consultation has yet to be published, and no clear announcement has been made as to when such legislation will be triggered. Whilst Government originally published guidance on new build warranties, this was withdrawn in July 2022, and no further guidance has been published since.
That being said, these changes are inevitably on the horizon, and developers and housebuilders must start to prepare.
How Can Developers Prepare?
Property developers should begin engaging with their warranty providers now, particularly if any agreements with them are being renewed, and they should also budget any consequent increase in insurance premiums into their development costs. Given the length of time the policy must cover, an A-rated insurer will be required to back any such warranties.
To discuss any of the points raised in this article, please contact Stephanie Houston or fill in the form below.