On Friday 21st November, the Government issued a press release stating that following consultation with RICS and The Building Societies Association (BSA), EWS1 forms will no longer be needed on buildings that do not have external wall cladding.
The statement issued by the Government raises far more questions than it answers and in time, further clarification will be required. Insofar as the wider mortgage lending market has decided that ESW1 forms will not be required unless the building is clad then that is to be welcomed, but a number of important questions remain to be addressed.
The first issue concerns the scope of the ‘agreement’ reached. The BSA does not speak for the whole mortgage lending market and represents only a section of it, namely 43 building societies and 6 credit unions. It does not represent banks or other mortgage providers and so the impact of the ‘agreement’ reached is at first blush limited. It may well be that the Government and RICS are attempting to bring in other mortgage providers into the agreement, but that is not clear from the press release. Ultimately the Government cannot dictate to the mortgage lending market how it assesses risk when lending mortgage finance to someone buying or selling a flat within a building that may have a defective external wall system. Certainly, there is no suggestion in the press release that the Government intends to underwrite that risk. That said, with the BSA on board it will be interesting to see whether other lenders follow suit, as a failure to do so may well see the BSA members inundated with mortgage applications.
The second issue concerns the basis for the agreement. There are very many buildings in the United Kingdom, of all heights, that have masonry or rendered external wall systems that are nevertheless non-compliant with the Building Regulations and unsafe. A tall building (for example) may be entirely constructed with a brick outer skin, but it may have defective cavity barriers and readily combustible insulation sitting behind it. That combination – which in the vast majority of cases will constitute a breach of Building Regulations – is all too common and would automatically obtain a B2 rating on any competently issued EWS1 form. It appears, however, that RICS and BSA do not consider this risk to be significant and will be happy to lend even though the cost of remediating the external wall system may be just as expensive (in some cases more so) than remediating an external wall system that features a cladding that is not of limited combustibility. To put it another way, the lack of combustible cladding will not relieve the purchaser or owner of a potential liability to pay a (potentially) significant service charge contribution towards the remedial costs, nor will it mean the building’s value is unaffected. Both of those issues are at the heart of any mortgage lender assessing risk. So, while the ‘agreement’ is extremely positive and to be welcomed, the logic behind it appears a little fuzzy to say the least.
The third issue concerns those very many buildings that have combinations of external wall material including cladding masonry and render. It is unclear from the press release whether a building that is, say, 80% masonry, but has HPL as an elevation detail, will be exempt. This will need to be clarified. Those residents who are unable to transact their properties and are sitting in a building that has both a brickwork outer skin and elements of cladding will doubtless be anxious to receive that clarification as soon as possible.
Finally, the Government’s decision to spend £700k helping to train building surveyors to complete ESW1 forms is to be welcomed. There is a desperate need for additional resource in the market, not just for EWS1 forms but also when looking ahead to the requirements of the Fire Safety Bill when enacted. The extent and scope of the training will need to be carefully considered but it will be a challenge to utilise such a modest sum in order to elevate 2000 building surveyors to the competency levels of a fire engineer within a matter of six months. The press release rightly highlights the concerns about PI insurance. Unless the insurance market is prepared to embrace the newly qualified building surveyors then the Government’s intentions may not go very far. Ultimately the Government may have to consider acting as an insurer of last resort, something it is no doubt loathe to do.
The Government has come under considerable pressure to do something about the effect of EWS1 forms on the property market. It is depressing indeed that so many people have been adversely affected simply because they live in a building with a defective external wall system – a circumstance over which they have had no knowledge or control.
It is refreshing to see that at least one section of the lending market has been prepared to take a different approach to risk and will remove the need for an EWS1 form where buildings are not clad. The devil, however, is in the detail, and as we say above, the press release rather unfortunately raises more questions than it seeks to answer. But, it is a start, and for that reason it is to be welcomed.
For more information, please contact Mark London, Partner in our Construction team.