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.
