With law firms under increasing pressure to minimise the exposure to risk for themselves and their clients, the argument for more detailed search due diligence is becoming ever more compelling, writes Paul Addison, managing director of DevAssist Ltd.
Searches have come a long way in recent years with accelerated competition, technological innovation and enhanced quality in terms of information, reliance and service delivery. The Search Code has proved to be a strong output here among the better quality providers in a market polarized by national volume players like SearchFlow, TM and STL, regionally strong players such as the water utility companies; or local providers, either through franchise or smaller high street operations.
In general, the fortunes of the search market in 2012 mirrored that of the wider property market. Volumes typically rose circa five to six per cent year on year, with a year-end forecast of some 675,000 residential title transfers based on Land Registry trends. Forecasts for 2013 suggest similar rises for the residential market, although much will depend on the appetite for lending and affordability not just for first time buyers but also for ‘second rung' home movers who have especially felt the affordability squeeze.
Limited housing stock availability and record low numbers of house building have continued to put the brakes on choice and supply. Restrictions on planning and the freeing up of land, together with insufficient incentive for developers to build on land banks that already have permission, has limited the prospect of more happy homeowners and, therefore, reduced the available conveyancing market.
Things may be changing for the better…
We have already seen some very positive lead indicators on lending in the last quarter of 2012 which could feed stronger conveyancing volumes, especially if income and employment factors remain favourable. There is also the continuation of the £80bn government Funding for Lending Scheme.
So, given this more positive context, it is essential that conveyancers strengthen their resolve to protect the home buyer with the highest levels of due diligence to ensure that transactions can proceed in the full knowledge that any risks have been properly identified and explained.
This is especially important given a further tightening of risk management compliance standards within law firms, with conveyancing in the front line of reputational and fraud risks. Overcoming the incidence of fraud is, of course, essential from a practice management perspective, but the searches that conveyancers select and the transparency of advice provided is paramount.
With a robust regime of fines by the Solicitors Regulatory Authority (SRA) starting from the beginning of 2013, firms must ensure that they obtain the fullest possible search information and opinion to demonstrate they have mitigated all possible risks.
Perhaps the greatest risk requiring stronger search due diligence will come from planning and development pressures through the roll-out of the National Planning Policy Framework (NPPF).
Local authorities are sitting on a backlog of some 400,000 approved planning permissions, awaiting developers who have sat on their hands, or don't feel incentivised enough to build. This backlog could now be shifted by the government's announcement of a £661m cash payout to England's 353 councils as a reward for the future delivery of 142,000 new homes. Also, the government's Funding for Lending Scheme will bring more 90-95 per cent loan to value deals for new build properties into play, especially for first time buyers.
It's all about meeting demand and this is most keenly felt in urban areas where land within the built envelope, such as garden or vacant brownfield plots, could be readily in-filled.
This sets two hares running, one for the NIMBYs and those concerned about risks of over development affecting their immediate environment; the other to offer, finally, the realisation of value from property assets that have underperformed in the economic downturn.
Existing planning search information obtained through a property search provider is only good enough to highlight a list of planning applications, large or small, and whether they were approved or rejected. While this gives a top-line view of the kind of regimes that exist in local authority planning teams and what precedents have been set, it doesn't accurately portray what could be allowed in the future.
This becomes more relevant when you consider the cultural shift being imposed by central government that encourages a presumption in favour of development.
Martin Edwards, one of the UK's leading planning law barristers, from 39 Essex Street says:
'I am of the opinion that in order to fully safeguard client interests, you should undertake deeper due diligence on planning matters and get an independent professional opinion on the kind of development and its specific likelihood of approval in the context of the new NPPF regime.
'Information is power. So why would any conveyancing solicitor not offer their client the chance to learn about what the future may hold for them in terms of any development threat or opportunity? After the Government's Housing for Growth Policy Statement in September, it is clear that the acute housing shortage will lead to planning authorities looking more closely at all sites with development potential. Identifying those sites provides solicitors with the opportunity to add real value to the service they provide for their clients.'
DevAssist's unique search reports offer conveyancers a far more comprehensive view of the risk of future development, its density and the potential impact upon the searched property. From the law firm's perspective, there could be a failure to report a material change to the environment that is detrimental to the client's enjoyment of the home, together with any capital loss.
From an investment perspective, a client may have missed out on a valuable plot that could realise a high-yielding development, with all of the loss of potential income and livelihood risks that a lack of guidance could entail.
The key issue for all conveyancers is time - it is virtually impossible for a firm to make a thorough examination of land use zoning, its implications for change under NPPF and an estimate of the impact and still be comfortable with the level of their PI provision. We apply insight from our experience of advising developers on potential plots, so we know what they look for and liberate this for the home buyer.
These risks are clearly presenting greater threats than those of contaminated land that continue to receive the Warning Card. With planning and development impacts, the risk of material breach to client care is far starker. Up to 85 per cent of properties within the settlement envelope could be affected by some form of future development risk or opportunity. These future risks will not be picked up in a local authority search or information from planning portals.
Searchflow, one of the UK's leading property search providers, understands this. Director Richard Hinton says:
'We are seeing many of our clients taking a fresh look at what standard searches they offer in the context of best practice due diligence. High quality firms want to differentiate by providing a more inclusive service that lifts every rock and takes a holistic view. By adopting a more prudent approach to risk and undertaking more planning, environmental and flood searches, more certainty is being delivered into the transaction.
'The impact of new planning proposals could be substantial. Views may be ruined, enjoyment of the property may be reduced, and the value of the property may also be affected either positively or negatively. That's why we have added DevAssess as a new core report to our range as we believe this, together with other matters such as subsidence, do more to change the game for homebuyers. It is imperative that conveyancers provide their client with all they need to be able to make a more informed decision before they purchase.'
While local authority, drainage and water searches are regarded as mandatory, others are variable according to how they are offered in the client care letter. Putting the onus on the client to consider the merits of an optional search places them at an immediate disadvantage because they cannot make this judgment without insight.
Environmental searches have become increasingly adopted as standard, but in areas where conveyancing costs are tight and competitive this is frequently put in the optional box. The Law Society Warning Card on Contaminated Land and the requirements of the Environmental Protection Act 1990 clearly highlight the risk of the homebuyer paying for pollution when the original polluter cannot be found - a surefire route to potential litigation against the law firm for not advising appropriately.
Historically seen as 'just part of the environmental search', conveyancers must reappraise flooding as the most likely environmental hazard that will spoil the quiet enjoyment of the home. With 2012 confirmed as the second wettest year since records began and no real sign of a halt to this trend, flooding is public enemy number one and it doesn't need a nearby river to cause it. Groundwater levels are now so high across vast swathes of the country that even a modest amount of rain can cause saturated soils to rise up through floorboards.
Far more detailed insight into soil geology and local conditions, based on flood extents, past claims and incidents, can shed more light on the local risk and must be considered an essential add-on to environmental searches.
While law firms must stay price competitive, this shouldn't be the only game in town. Respect is earned by offering a wider range of core, low-cost searches that more than prove their worth in the context of a financial burden that would be placed on the client had they not known the issues before exchange.
Paul Addison is the managing director of niche legal and professional services company DevAssist Ltd.
DevAssist Ltd provides a range of search reports designed to alert property buyers to development risk or hidden value. Visit DevAssist Ltd or call 01342 890010 for information.