Andrew MacLeod, Partner at Robin Simon outlines how the structural warranty provides a safety net for our most valuable assets…
Mortgage lenders require newly built or converted residential property to be covered by a building standards indemnity scheme, also commonly referred to variously as structural warranties, new home warranty schemes, structural defects policies or latent defects policies.
A structural warranty provides the buyer of a residential property with insurance cover against the costs of putting right defects in the property that arise after completion of construction due to defective design, workmanship or materials. The insurance cover usually runs for 10 years from completion of construction.
Defects arising in the first two years after completion are often the responsibility of the builder to put right at his own expense. After that, the insurance cover meets the remedial costs. The cover usually protects against the costs of putting right defects of a structural nature, weather-proofing and waterproofing and works required to prevent a threat of imminent collapse. Other defects and consequential losses will usually be excluded from cover.
It is important to consider carefully the likely reinstatement costs to ensure the sums insured are accurate and adequate.
Because structural warranties can usually be assigned to subsequent buyers, they are important both to the first purchaser and for the re-sale potential during the first 10 years from completion, wherever mortgage lending is involved. The seller of the property is usually expected to procure the cover, so it is a vital consideration for developers and building contractors building residential properties for sale.
There are a dozen or more structural warranty schemes that are potentially acceptable to mortgage lenders – but not all schemes/policies are acceptable to all lenders and whilst many lenders will consider other schemes on their merits, not all will.
Developers, including building contractors performing the development role, will want to take the time to understand which schemes/policies are likely to satisfy the widest range of mortgage lenders. This should be done prior to embarking on a project when cover can be obtained on the most advantageous terms.
Beyond the sector of mortgage lending on new residential properties, latent defect policies are available for a variety of other new property development – for example, commercial property development, mixed residential and commercial development, and private rental developments where the policies typically cover structural defects and additional losses, such as loss of rent and business interruption losses. Cover for mechanical and electrical services can also be arranged.
As with the residential warranty schemes, these policies operate on a “first party” basis where cover is dependent upon establishing the existence of a defect rather than who is responsible for the defect. They eliminate the need to establish fault and the costs associated with that.
Where a property does not have the benefit of a structural warranty, an alternative for developers and contractors is the “Professional Consultant’s Certificate”. Unlike a structural warranty, this is not an insurance policy. Many lenders will require the building work to be monitored by a professional consultant belonging to one of several prescribed professional bodies, who must then provide a Professional Consultant’s Certificate in a prescribed form.
Andrew MacLeod
Partner
Robin Simon
Tel: 0333 010 0000
Andrew.MacLeod@triton-global.com