Cracking the code

Most housebuilders will not be able to offer NHBC, premier guarantee and LABC new home warranties without adopting a new consumer code for homeowners to come into force on 1 April 2010. But most homebuilders are not aware of the full implications of the code and have not put the necessary systems in place.

The code has come about as a result of the Barker review of 2004 and the Office of Fair Trading market study into the house-building industry dated October 2008. The code's purposes are to ensure that homebuyers are treated fairly, know what service levels to expect, are given reliable information upon which to make their decisions and know how to access speedy, low-cost dispute resolution arrangements if they are dissatisfied.

Although the code is voluntary because the majority of new homes in this country are sold with the benefit of a NHBC, premier guarantee or LABC new home warranty, it is likely that homebuilders will not be able to avoid complying with the code.

The code does not apply to second hand properties '“ for example, homes taken in part exchange by the homebuilder '“ properties acquired by registered social landlords, properties built by self builders for their own occupation and properties built under architect's certificates.

Pre-exchange

There is a requirement that all sales and marketing material must be clear and truthful. This is not a major burden as homebuilders are already familiar with the importance of this following the passing of the Property Misdescriptions Act 1991 which affects homebuilders as much as the estate agents who are selling their properties.

The requirement to provide a written reservation agreement, an explanation of the home warranty cover and a description of any management services and organisations to which will be committed and an estimate of their cost is much more significant. So this information has to be ready to be handed over in the sales office or by the selling agent. This means the service charge estimates and audited accounts for the last three years, memorandum and articles of association of management companies and a list of contents (for example, white goods, curtains, carpeting etc.).

The booklet setting out full details of the home warranty cover needs to be available too. There needs to be brochures or plans reliably showing the layout, appearance and plot position of the property.

Another new requirement is that there needs to be a person within the homebuilder's organisation who will deal with questions. That person needs to indicate how the homebuyer is to contact them '“ by post, email, text or phone.

There is a stipulation in the code that the housebuilder must not restrict the homebuyer's choice of legal representative. So, arguably saying to a homebuyer you will only pay their legal costs if they use a particular law firm is restricting their choice and would fall foul of the code.

There are detailed requirements in relation to the reservation agreement. The code states it must set out the amount of the reservation fee, state what is being sold, the purchase price, the deadline date when the reservation agreement comes to an end, and how long the price will remain valid. The reservation agreement needs to be signed by both parties. Once the reservation agreement is signed, the housebuilder must not attempt to sell the property to another buyer within the time period stated in the reservation agreement and the homebuyer has the right to cancel the reservation agreement at any time during the reservation period. The reservation fee must be returned if the reservation agreement is cancelled. So, the practice of non-returnable holding deposits appears to be curtailed by these provisions. These are widespread and this will have a big impact. It is, of course, very good news for homebuyers.

If the homebuyer deducts any administration expenses from the reservation fee, this must be set out in advance in the agreement.

Exchange of contracts

Contracts for sale must clearly state the termination rights and comply with the Unfair Terms in Consumer Contracts Regulations 1999. This may mean conveyancing solicitors need to add a paragraph to their standard contracts explaining termination rights to buyers.

After exchange of contracts, where a change of design, construction or materials to be used in the home that would significantly and substantially alter its size, appearance or value, the housebuilder must formally consult the home buyer and get their agreement. There is no definition in the code as to what 'significantly' or 'substantially' means but presumably it would need to be greater than a ten per cent increase or decrease. It would need to be considerable or large.

The other change in the contract is that the contract for sale should state the anticipated date by which notice of completion should be served. The contract cannot remain silent as is the case for most developer's sale contracts.

The homebuyer is to have the right to terminate the contract if there has been a substantial and significant change to the home or there is unreasonable delay in finishing the construction of the home and serving the notice to complete. The code then sets out a specimen clause and states that if the house has not been completed within six months for houses or 12 months for apartments, the homebuyer has a right to terminate the contract. This is a very significant change and will be a welcome relief for homebuyers who have been locked into sale contracts for lengthy periods with their deposits held by homebuilders as agents.

Further, the code states that there must be arrangements in place to protect contract deposits. All of the home warranty policies protect the deposit so this is perhaps not so significant.

After sales

The homebuilder must provide the homebuyer with an accessible after-sales service and explain what the service includes, who to contact and what guarantees and warranties apply to that home. This should include the contact details of the person they should contact during the first two years of the home warranty cover, explain the process for handling emergencies and make clear how long the after-sales service is available for. The housebuilder should also give details of any other standard guarantees; for example, electrical appliances, central heating systems and boilers with relevant contact details.

Dispute resolution

Dispute resolution is one of the most significant parts of the code. It provides that the homebuilder must have a system for dealing with complaints which must be dealt with within a reasonable period of time. The homebuyer should be told of the likely timescale. If the complaint is not dealt with in a reasonable period of time or the homebuyer is not satisfied with the outcome then the matter is referred for determination by an adjudicator under the dispute resolution scheme set out in appendix A of the code.

This adjudication process provides that a trained adjudicator reviews written submissions from both parties and issues an award based on his conclusions. It is the home warranty body that deals with the complaint under the terms of the home warranty policy. The homebuilder must bring the claim to the dispute resolutions provider within three months of the date of the homebuilders' final response to the original complaint or within three months after the date of the original complaint, whichever is the later.

A registration fee of £100 plus VAT is payable by the homebuyer on submitting the application for the complaint. The independent dispute resolutions scheme provider will ask the homebuilder to respond and the homebuilder may resolve the complaint without a formal adjudication process. This is called 'early settlement' and the homebuilder only incurs a case fee of £100 plus VAT.

If this does not happen, the homebuilder must submit a response together with a payment of £300. The homebuyer is given a copy of the homebuyer's response and given a chance to respond. At this stage no further new complaints are allowed.

The adjudicator then considers both submissions and decides whether there is a legitimate dispute. The homebuyer is expected to have acted reasonably and controlled their costs. The adjudicator then makes his decision in writing and issues it to both parties. The decision may include a performance award (where the homebuilder has to do something) and a financial award (where the homebuilder has to pay something to the homebuyer) or a combination of the two. The adjudicator can also make a discretionary award up to a maximum of £250. A maximum value of the combined award is £15,000 inclusive of VAT.

The adjudicator's decision cannot be appealed. A homebuyer can refuse to accept the award and resort to litigation in the courts but the courts are unlikely to view this favourably as it is likely to be considered wasting court time. A homebuilder remains liable for the award even if they are removed from the home warranty body's register.

This code has received little publicity in the legal profession. Homebuilders are aware of it because their usual home warranty providers have been providing free training sessions throughout this year.

Arguably, this is not a good time for developers to have to change all of their literature and sales material with margins severely affected and house sales still sluggish.

However, if the code is successful, it will cause the cowboys to clean their act up and it will not cost the homebuyer very much to enforce their rights and remedies under the new dispute resolution scheme.