Bell & Scott's Property Update, June 2008

Welcome to the June 2008 issue of Bell & Scott’s Property Update.

In this month's issue we provide you with an Update on the new certificates which owners of property need to have when they are selling or leasing them.

We also comment on a case where a landlord failed to recover from an insurance company following damage caused to his property by a suspicious fire because he knew about the sprinkler system having been turned off before the date of the fire.

We also update you on (1) the Scottish Government’s response to the previous administration’s consultation on "Energy Efficiency and Micro-generation: Achieving a Low Carbon Future"; (2) the introduction of new consumer protection laws which impact on the property market; (3) research into the use of Planning Agreements in Scotland; and (4) consultations on proposed amendments to Scottish Building Regulations.

Update

HIPs, HRs, EPCS and other building certificates

Like school leavers entering the job market armed with certificates, properties must carry theirs when they enter the sale or leasing market. Like pupils’ exam certificates, they score a building’s achievements in certain disciplines and help buyers or tenants, like employers, to decide whether the building is the asset they want to have.

The qualifications - what are they?

The Home Information Pack (“HIP”)

The HIP is the certificate needed for a home south of the border. A seller of a residential property in England and Wales, of whatever size and age, now needs to provide one of these to a buyer when the property is put on the market. Unlike a Home Report in Scotland, a HIP does not, as a mandatory requirement, contain a valuation survey. However, it must, as a matter of law, contain an Energy Performance Certificate, a sustainability certificate, local authority and title searches. There is scope to include, in the HIP, any other relevant information which will aid a buyer to make an informed decision on whether to buy or not – this may include copies of planning permissions, details of shared boundaries and maintenance of common items and indeed summaries of complex title issues.

A Home Report (“HR”)

The HR is the equivalent of the HIP in Scotland. From 1 December 2008, sellers of residential properties will need to obtain an HR when the property is first marketed and to make this available on request to prospective buyers. New build properties, newly converted premises and portfolios of residential properties are amongst the categories of property which do not need to have an HR. The HR will contain three documents: a Single Survey, an Energy Report and a Property Questionnaire. The Single Survey comprises an assessment by a surveyor of the condition of the home, a valuation and an accessibility audit for people with particular needs. The Energy Report requirement is met by providing an Energy Performance Certificate as in England and Wales. The Property Questionnaire is an information sheet completed by the seller of the home. It contains information about the home that will be useful to a buyer. The detail covered in this part of the HR, will be like the authorised information which may, but is not by law required to appear, in the HIP in England and Wales.

An Energy Performance Certificate (“EPC”)

An EPC is a certificate which rates the energy efficiency of a building and also records the environmental impact of that building from carbon emissions. An asset rating between A and G is given on the Certificate, similar to that which applies to domestic appliances such as washing machines and freezers. A will be very efficient and G very inefficient. From 1 July 2008 buildings in England and Wales over 2,500 sq m need to have an EPC and the remainder of all commercial buildings need to have them with effect from 1 October 2008. In Scotland, on the other hand, the requirement in respect of all commercial buildings does not kick in until 4 January 2009. From January, building regulations require the certificate to be affixed to the building and it is not to be removed unless replaced with an updated version.

A Display Energy Performance Certificate (“DEC”)

This is the type of EPC which public buildings in England and Wales which have a useable floor area of more than 1,000 sq m and to which the public have access must display in a prominent place. This category of EPC does not apply in Scotland. Public buildings in Scotland with a useable floor area of more than 1,000 sq. m must display the type of EPC which is applicable to all commercial premises in a prominent place.

A sustainability certificate

This is a mandatory part of the English and Welsh HIP but not part of the Scottish HR. It is different to an EPC and amounts to information in the form of either a certificate showing the results of assessment against sustainability standards or a statement that there is no certificate because no assessment has been made. Sustainability standards are set out in the Code for Sustainable Homes which was launched in England & Wales in December 2006. The Code measures the sustainability of a new home against nine categories of sustainable design giving the home a rating. The Code uses a star rating system to communicate the overall sustainability performance of the home. The purpose of sustainability standards is to improve the sustainability of new homes during both the construction and the lifetime of the home.

A table showing which certificates are required is accessible here

Further information on the Home Report is available on the Scottish Government’s website accessible here

Further information on the implementation of EPCs, giving details of providers and formats, can be found on Scottish Building Standards website accessible here

Recent Decisions

Faulty sprinkler system proves costly between friends

Mr Ansari claimed damages against his insurance company because it refused to pay out under the commercial property owners' insurance policy he maintained over his property in Manchester. Extensive damage to his property had been caused by a fire. Mr Ansari’s property was occupied by a friend under a business lease which imposed the normal repairing obligations on the tenant and a requirement to observe the terms of the landlord’s insurance and to pay the premiums. On the insurance proposal form submitted to the insurers by Mr Ansari, the tenant's business was described as "wholesaling kitchenware". Mr Ansari also declared that the premises were protected by an automatic sprinkler system. After the fire, the insurance company found out that the sprinkler system had been turned off before the fire and that there was a considerable quantity of goods on the premises that could not be described as kitchenware, including petrol powered mini motorbikes. The insurance company cancelled the policy stating that there had been a material alteration to the premises or business carried on at the premises and a material change in the facts stated in the proposal form. Mr Ansari, for his part, argued that if the change in use of the premises and the fact that the sprinkler system was not working gave the insurance company grounds to cancel the insurance, he was protected by “an non-invalidation clause” in the policy which provided that the interest of the owner of the premises would not be prejudiced by any act or neglect whereby the risk of destruction or damage was increased without his authority or knowledge. He claimed that, at the time of the fire, he knew nothing about his tenant’s storage of goods which were not covered by the type of business carried on at the premises as stated on the proposal form nor did he know that the sprinkler system was defective and had been turned off by his tenant.

Mr Ansari, in the heat of the moment at the fire, had told the investigating fire officer, that the sprinklers were defective and to do that he must have had that knowledge prior to the fire. His insurance policy required him to inform the insurers of any material change in circumstances which would affect the insurance contract which was made up by the statements he made in the proposal form and the policy document. The statements he had made on the proposal form formed the basis of the assumption of risk by the insurance company. A material change in those facts would, according to the policy, terminate the cover. The court decided that turning off the sprinkler system did more than merely increase the risk of damage by fire, it constituted a material alteration of the nature of the subject matter of the insurance. Mr Ansari’s prior knowledge of the defective sprinkler system should have been disclosed to the insurers and, therefore, he could not take advantage of the non-invalidation clause. Therefore, the cover provided by the policy terminated prior to the fire and that insurance company was entitled to refuse to pay out for the damage caused.

Keith Rawlinson, solicitor in our Retail and Leisure Team comments:  

Although decided in England, the case serves as a timely reminder to Landlords both north and south of the border to keep abreast of developments at their property. Insurance companies must be kept informed of material changes in the use of the property or changes in circumstances originally disclosed by Landlords to their insurers at the application for insurance stage.

You get a sense, when reading the case, that the fire took no-one by surprise! The Judge was in no doubt that Mr Ansari knew that the sprinkler system was defective and had been turned off prior to the fire. It was pretty clear from this case that Mr Ansari’s tenant, a close friend, was in financial difficulty as he had not paid the water charges for the premises and no water would have appeared from the sprinkler system had it not been turned off and a filing cabinet been put in place to jam the operating handle. The switch off was a material change to the facts disclosed in the insurance application form triggering the end of the cover.

Property owners and occupiers have to be careful when filling in the applications for insurance and any renewal of a policy and to be aware of changes which need to be declared to the insurance company. An insurance contract is one that requires the parties to act in the “utmost good faith”. What this means is that you need to make full and honest declarations and disclosures on any proposal or renewal form, allowing the insurance company to assess the risk and to consider whether to insure and at what premium to do so. From the judges tone in this case, it is abundantly clear that there was a wilful breach of this “utmost good faith” requirement by Mr Ansari.

Landlords’ leases will require tenants to observe the terms of insurance policies and to disclose any changes in the use of, or alterations to, the premises or any of the landlords’ fixtures (such as a sprinkler system). Any failures and omissions will be at the financial risk of the tenants. A prudent landlord will also get a “non-invalidation” clause in the insurance contract which should give protection against any act of a third party which increases the risk of damage without the authority or knowledge of the policy holder. Mr Ansari would have been covered by this had he not known about the defective sprinkler system before the fire. For some landlords, the safety net provided by that clause may be too expensive to obtain. Whether or not that fall back is there, the prudent landlord should also be aware of what is going on at his property when, either he or his managing agents, have the opportunities, provided by the lease, to be physically on the property. If a tenant has failed to observe the obligations imposed on it under the lease, in so far as insurance is concerned, and there is damage or destruction to the premises which an insurance company refuses to pay out on as a result of failure to disclose a material change, then a landlord would have to rely on his lease to recover from the tenant who may or may not be in a position to make good the damage caused.

From the tenant’s perspective, it will always be in its interest to ensure that it is getting the protections afforded by the lease in return for the premiums it will be paying to the landlord. Where there is a non-invalidation clause, a tenant should be keen get the landlord to obtain from his insurers “a waiver of subrogation rights” which should protect the tenant from being pursued directly by the insurance company.

Case referred to Qayyum Ansari and New India Assurance Limited [2008] EWHC 243 (Ch)

A full text of the decision is available on the British and Irish Legal Institute website accessible here

News

Energy Efficiency and Micro-generation: Achieving a Low Carbon Future: A Strategy for Scotland: The Scottish Government Response

The previous Scottish administration issued a draft Energy Efficiency and Micro-generation Strategy for Scotland in order to gather views from all sectors on current and future energy efficiency and micro-generation policy in Scotland. The current administration has now published a report on that consultation setting out a summary of the issues raised during the consultation and giving the Scottish Government's response to each of those issues.

During this year, the Scottish Government will develop an Energy Efficiency and Micro-generation Action Plan providing an overview of the actions taken and those proposed.

This Action Plan will allow the Scottish Government to report on the progress being made across all the programmes and initiatives across all Directorates. It will include relevant milestones and targets, and where possible will show anticipated carbon savings from these actions.

The report on the consultation is available on the Scottish Government website accessible here

Consumer Protection from Unfair Trading Regulations

The Consumer Protection from Unfair Trading Regulations 2008 came into force on 26 May 2008. A briefing note for housebuilders on the terms of the Regulations is available on our website accessible here

Planning Agreements

The Scottish Government has published a report which assesses the number and value of planning agreements secured in Scotland between 2004 and 2007. The Report looks at trends in the use of agreements and forecasts the value of contributions that may be secured to 2010.

The research shows that one third of Scottish authorities had formula-based developer contribution policies for calculating what the level of contributions should be. Those authorities that followed this policy secured, on average, £2m per annum more than those without such policies. From this, the report concludes that introducing formula-based contribution policies is more likely to increase the value of developer contributions. Those authorities which operate policies are developing these to secure contributions for a wider range of purposes. It can be expected that this trend in policy development will increase the number and value of developer contributions being secured annually.

Though no specific recommendations are made, the Report suggests that there is a requirement for “consistent, relevant and proportionate use of agreements and related policies covering levels of contribution for different purposes in different situations by planning authorities across Scotland”.

In the meantime, an English authority, West Northhamptonshire Development Corporation, is considering plans to fix a level of infrastructure levy for new housing developments on greenfield sites. The proposal is to charge developers £20,000 per unit under the Community Infrastructure Levy (“CIL”) system brought in the wake of the failed Planning Gain Supplement proposal. Previous planning consent contributions, in that authority area, only provided, on average, £3,500 per unit.

To date the Scottish Government has not opted to mirror the CIL as proposed in England & Wales, but the conclusions drawn from the data obtained in the research may point the Government in that direction. Watch this space!

The report on the research is available on the Scottish Government’s website accessible here

Prosposed amendments to Scottish Building Regulations

The Scottish Building Standards Agency (SBSA) is consulting on the Scottish Government’s proposals for amending regulations under the Building (Scotland) Regulations 2004 and the guidance provided in the technical handbooks giving guidance on ways to comply with the building regulations. It is consulting on the regulations which cover noise, fire and standards.

Details of the consultations can be accessed on the SBSA website accessible here