Lending a helping hand to borrowers

Andrew Hopkins explains how changes to the Lenders' Handbook should reduce anxiety over house buying

On 1 April 2003, the Council of Mortgage Lenders (CML) will amend the instructions in the Lenders' Handbook for England and Wales for newly built and newly converted properties.

Since 1999, the Lenders' Handbook has provided complete instructions for solicitors and licensed conveyancers, acting on behalf of both borrowers and lenders in residential conveyancing transactions.

The amendment will require the conveyancer to have confirmation from the builder that a new property has passed a final inspection by the home warranty provider before requesting the mortgage funds.

The aim of the amendment is to ensure the borrower does not move into a new property that is not satisfactorily complete.

Evidence to date has confirmed that this is not always the case, with some builders offering incentives to buyers to move in before a property is actually finished.

This can lead to a catalogue of problems, ranging from missing doors to uninstalled lifts.

The result can be months of misery for homebuyers as they endeavour to negotiate with builders to correct the (sometimes dangerous) defects.

The CML has held discussions with the House Builders Federation (HBF), the new home warranty providers (NHBC, Zurich and Premier Guarantee) and the Law Society to find ways to address this problem.

In 2001, one of the major home warranty providers wrote to all house builders requesting that they review their handover procedures and take action to reduce the risk of homebuyers moving in before a property is complete.

Reports showed that a substantial number of properties were 'finalled' (classified as substantially complete) by an inspector after legal completion.

In addition, in 2000 one in five properties built by the top 26 builders received their pre-handover inspection after legal completion.

The pre-handover inspection involves identifying reportable items in advance of a property being finalled.

The position improved slightly in 2001, following increased attention to this issue.

After a robust campaign in the press (supported by the then Housing Minister, Lord Falconer), the CML was asked to review the position on behalf of mortgage lenders.

Both builders and the new home warranty providers recognise that there has been criticism of their sector on this issue and are keen to reach a workable solution.

Lenders are also supportive and see this approach as building on their long-standing support for the warranty schemes.

Ultimately, lenders also want to ensure that their property is good security for the mortgage and not incomplete when the mortgage is granted.

With strong mutual support for the overriding principle, the main task has been to develop a framework that does not lead to excessive bureaucracy and delays to the home buying process.

From 1 April 2003, a lender will not release the mortgage funds for a new property until the buyer's conveyancer has received confirmation in the form of a cover note that the property has received a satisfactory final inspection, and that a full new home warranty will be in place on or before legal completion.

Examples of the new home warranty providers' cover notes will shortly be available on the CML Web site.

In practice, the new home warranty provider will give the cover note to the builder immediately after the property has passed the final inspection.

The builder or the builder's conveyancer will then pass the cover note to the buyer's conveyancer.

This revised approach will apply to all transactions involving new properties being built or converted in accordance with a new home warranty scheme and which exchange contracts on or after 1 April 2003.

It will not apply to self-build schemes or where the construction or conversion of a property is being supervised by a professional consultant without a new home warranty scheme.

On 1 April 2003, the CML will amend 6.6.2 of the Lenders' Handbook to read: 'Before you send us the certificate of title, you must obtain a copy of a new home warranty provider's cover note from the developer.

The cover note must confirm that the property has received a satisfactory final inspection and that the new home warranty will be in place on or before completion.

This will only apply where exchange of contracts occurs on or after 1 April 2003.

This does not apply to self-build schemes.

Check part 2 to see what new home warranty documentation should be sent to us on completion.'

The new home warranty providers are currently doing much work to ensure that the necessary procedures are in place in the run-up to implementation.

This includes guidance to builders on inspection standards, so that builders will only apply for a final inspection once all the standards have been met.

The HBF is looking at what changes should be made to builders' contracts for sale to reflect the revised approach and address any concerns that conveyancers may have regarding time constraints and liability.

Builders will need to:

- Ensure that the property is completed to the required standard before applying for the final inspection by the new home warranty provider;

- Supply the cover note immediately to the buyer's conveyancer;

- Bear in mind when formulating the legal completion date in the contracts for sale that the conveyancer will be unable to submit the certificate of title to the lender until the conveyancer has received the cover note; and the lender will have a minimum notice period of five working days (in some cases longer) for the release of mortgage funds after receipt of the certificate of title, and;

- Request their lawyers to make the necessary amendments to the legal documentation for the sale of new properties as a result of the changes in approach and timing referred to earlier.

It is clear that this is a significant change in approach to improve standards and all the parties are working together to achieve smooth implementation.

In the meantime, conveyancers are reminded that the second edition of the Lenders' Handbook for England and Wales came into effect on 1 October 2002.

Conveyancers instructed in accordance with the Lenders' Handbook must now refer to the second edition, which is only available on the CML Web site (www.cml.org.uk/handbook).

More information on the proposed amendment to the second edition of the Lenders' Handbook is available on the Web site.

Andrew Hopkins is legal adviser at the Council of Mortgage Lenders