The Royal Institution of Chartered Surveyors (RICS) has published new guidance for mortgage valuers acting for lenders on transactions involving flats in multi-storey buildings. This will come as welcome news to buyers and sellers alike.
What has caused the hold-up in the market?
The Grenfell Tower tragedy has had a significant and wide-ranging impact on many aspects of the property market. One such consequence has been an adjustment in how flats in multi-storey buildings are valued for mortgage purposes, with an emphasis on resident safety and highlighting fire safety concerns. So far, so good.
A key feature of this adjustment was the introduction by the government of a new form, an External Wall Fire Review Form, or EWS1, with the purpose of assessing the safety of multi-storey apartment buildings. The form records the assessments carried out on the external wall construction of such buildings, where (1) the highest floor is 18 metres above ground level or (2) specific concerns exist. The form, which has been endorsed by RICS, can only be completed by a designated competent person.
Essentially, the form is designed to provide a certificate either that a building is safe, or unsafe. An unsafe finding will require measures to be put in place, and/or works to be implemented, to bring the building up to the required safety standards. Undoubtedly therefore an unsafe certificate is likely to, at best, hold up any sale or re-mortgage, if not cause it to go abortive.
Unfortunately, the implementation of the EWS1 form has led to a number of undesirable consequences across both the residential and commercial property markets for flats in these buildings, with many leaseholders left unable to either sell or re-mortgage their property.
Is a form required?
It may appear a black or white question looking at the guidance but there has been widespread confusion over which buildings, and therefore which transactions, the ESW1 form should apply to. I am working on a transaction at the moment where a lender (or rather its valuer) is insisting that one is needed but the landlord is insisting the opposite. There is a stalemate and my client is caught in the middle.
The problem for leaseholders (or prospective buyers of leasehold property) is that lenders are asking their valuers to take a much closer look at fire safety issues. Valuers aren’t experts in this area, so if they are left in any doubt, inevitably they will err on the side of caution on such matters. What I am hearing from lender’s solicitors is that they are seeing an almost universal approach taken by valuers in requiring an EWS1 form for valuations on all properties within multi-storey blocks.
Lenders are by their very nature risk averse, particularly given the current safety conscious environment resulting from the fallout of the Grenfell tragedy. They are unlikely to override the assessment of their valuer. Therefore, many lenders are requiring a clear EWS1 form for buildings which do not form part of the government’s recommended guidelines. Without this, they will not lend on that transaction.
Lack of available experts
If it is agreed that an EWS1 form is needed, it is not straightforward for a landlord to then simply commission one. Somewhat surprisingly, you may think, given the fact that there is such a focus on fire safety and cladding at the moment, there is a relative shortage of qualified competent professionals both able and willing to carry out these assessments. One other reason for such a shortage is the reluctance of PII insurers to underwrite the risk of qualified professionals taking on this work, resulting in a lack of available cover and where cover is available, in higher premiums.
Lack of availability of indemnity insurance
If an EWS1 form is required and there is nobody available within a reasonable time-period to carry out the relevant assessments, the parties are stuck. In such situations where a problem cannot be adequately dealt with by other means, property lawyers typically resort to taking out indemnity insurance. However, unfortunately for lawyers and the parties involved, indemnity insurers are just not willing to underwrite this particular risk at the moment, so it is not an option.
The position of the landlord and cost of remedial works
Under the relevant lease, the landlord will almost certainly have responsibility for the structure of the building and ultimately the choice will be theirs whether to or not commission the EWS1 form. How do you convince a landlord there is a pressing need, especially when, as discussed above, many lenders are requiring EWS1 forms for buildings which do not fit the criteria in the official guidance? This task is made doubly difficult by the fact that it is the seller and prospective buyer, or leaseholder in the case of a re-mortgage, who have an interest in the transaction proceeding, and not necessarily the landlord.
The landlord will be fearful of an unsafe result and the likely huge cost of remedial works which will need to be undertaken as a result. In such a scenario, it would need to be agreed by all parties what works are to be undertaken and when, and who pays.
This may also involve the commissioning of further specialist reports. The landlord may be able to recover much, if not all, of the costs through a service charge but given the figures involved, the landlord may need to dip into its own pockets initially and tenants may well argue whether the costs are properly chargeable to them. All factors liable to scupper a sale or re-mortgage.
Given that any required remedial works are almost certainly going to be structural and necessitate at least partial destruction of parts of the building, the likely cost will be huge. I have heard of one example where the cost of remedial works required following the findings of an EWS1 form, per flat, equated to roughly half the market value of an average flat in the building.
The position of the lender following an unsafe EWS1 certificate
If an EWS1 form is commissioned and results in an unsafe finding, without the recommended remedial works being undertaken and adequate safety measures put in place, or at least the watertight assurance that such steps will be undertaken and completed promptly and within a defined timescale, a lender is likely to withhold funding. This will either cause a substantial delay to the transaction or it to be aborted altogether.
New RICS guidance
The issues highlighted above have created a fundamental imbalance in the market for properties in multi-storey buildings which has caused it to grind almost to a halt.
This has prompted the RICS into action by asking the government to intervene to prevent a more widespread stall in the housing market. The RICS have also now acted themselves, following a consultation in January 2021, by publishing new mortgage valuation guidance aimed to clarify the criteria and prevent mortgage valuers requiring EWS1 forms on properties that don’t require one.
The guidance means that, for buildings of:
- Over six storeys, an EWS1 form should be required where there is cladding or curtain wall glazing on the building, or there are balconies that stack vertically above each other (of which certain elements contain combustible material).
- Five or six storeys, an EWS1 form should be required where there is a “significant amount” of cladding on the building, there are aluminium composite material (ACM), metal composite material (MCM) or high pressure laminate (HPL) panels on the building, or there are balconies that stack vertically above each other (of which certain elements contain combustible material).
- Four storeys or fewer, an EWS1 form should be required only if there are ACM, MCM or HPL panels on the building.
The new guidance does not come into force until 5 April 2021, but early adoption is encouraged.
It is available to read in full on the RICS website, together with an updated version of the EWS1 form. It can be found here: https://www.rics.org/uk/news-insight/latest-news/press/press-releases/rics-makes-move-to-unlock-market-for-flat-owners/
The new guidance will not alleviate all the problems discussed above. However, it is hoped that by providing more clarity on whether lenders should request an EWS1 form before proceeding, there should be a knock-on effect in relieving some of the other issues. One would hope to see a curtailing of the type of stand offs which have been seen lately between lenders and landlords, and a reduction in the strain on the small pool of qualified experts tasked with carrying out these assessments.
It remains to be seen whether the new guidance will have a tangible impact. If any ambiguity remains in the guidance valuers are likely to continue to act cautiously and request an EWS1 form. It may not be until the other problems are addressed properly, such as the shortage of qualified experts and lack of indemnity insurance, that the market fully recovers.
Jack Lightburn – rhw Solicitors llp
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