UK: No Warranty No Mortgage No Sale

Last Updated: 22 January 2003
Article by Andrew Cooper

As you may be aware, the Council of Mortgage Lenders ("CML") requires that newly built or converted homes must have been constructed or converted under a new home warranty scheme acceptable to the CML, such as the NHBC or Zurich Municipal.

As from 1 April 2003, the CML will not release mortgage funds for new house purchases or conversions unless and until confirmation has been received by solicitors and licensed conveyancers working on behalf of buyers that the home has been signed off or "finalled" by an approved warranty organisation and that a full home warranty is in place on or before the date of legal completion.

This will apply to transactions involving new properties built or converted where contracts are exchanged on or after 1 April 2003.

Consequences For House Builders

Given that the vast majority of new house buyers buy with the aid of a mortgage, this requirement will have major implications for house builders and necessitate a review by house builders of their procedural steps for selling homes.

It will be vital for house builders to comply with the new steps the NHBC, Zurich Municipal and other approved warranty organisations have developed to comply with the CML initiative and not just at the pre-handover inspection, if house builders are to ensure there is to be no delay in their sale of homes.

House builders will need to comply with the new steps and ensure that homes are physically finished and finalled well ahead of the date of legal completion. A delay in legal completion through non-compliance will undoubtedly have contractual and financial cost implications for the house builder and the buyer, as well as accounting implications for the house builder seeking to complete sales ahead of a financial year-end.

Homes will need to be physically finished before an inspector is called out for an inspection.

House builders will need to ensure that site managers process and forward the issued cover notes to their solicitors efficiently and without delay.

House builders should be auditing now their existing schemes to ensure compliance with the new regime when it comes into force.

House builders should recognise that buyers solicitors and licensed conveyancers will need to satisfy themselves that the new initiative has been followed and review and amend standard form house sale contracts requiring completion on notice.

Where completion is to remain on notice, this should be conditional on the cover note being available first or the cover note should be issued prior to exchange.

Consequences For Buyers

A buyer’s solicitor or licensed conveyancer will need to ensure the house purchase contract addresses the point by making completion conditional upon the availability of the appropriate warranty certificate or that otherwise the warranty certificate has already been issued. The buyer's solicitor or licensed conveyancer will need to satisfy themselves that this has happened or will happen prior to legal completion.

As the CML initiative will be a major benefit to buyers buying with the aid of a mortgage, cash buyers should ensure they do not lose out in getting the same benefit, simply because there is no mortgage lender demanding evidence of the existence of the warranty before releasing mortgage funds.


The NHBC has responded to the CML initiative by setting up new systems and procedures to support house builders and to perform its own role efficiently and quickly once the change is in place. This has included recruiting more inspectors who will have the ability to issue a cover note immediately a satisfactory inspection has taken place. Inspectors, however, will need to be contacted by house builders at least 24 hours ahead of a request for a final inspection.

The NHBC will be introducing a new "finalling" system as from January 2003 and will issue a newly designed Buildmark Cover Note to the site manager as confirmation that the home has been finalled. This is to be forwarded to the buyer’s solicitors as soon as possible.

Under the NHBC system, if the home has not been finalled, any outstanding work will be categorised as either Red Reportable Items or Green Reportable Items. The NHBC has provided guidance to house builders on the categorisation of outstanding work.

Red Reportable Items will prevent an inspector from issuing a final certificate. To determine their existence the NHBC will apply what it calls a "logic test". If there are items, which would put the occupants at risk or result in a claim against the warranty or be the cause of significant disruption if rectified post completion, the NHBC will classify them as Red and the home will not be finalled. The house builder must then allow at least 24 hours before a re-inspection can be arranged.

If the answer after applying the logic test is no, then the particular item will be classified Green. Green Reportable Items will not prevent an inspector from issuing a final certificate. However, a lengthy number of Green Reportable Items could fail the logic test if requiring remedial work, which would involve significant disruption to the occupant.

It is likely that the site manager will be required to sign a confirmation that Green Reportable Items will be dealt with within a reasonable time or by completion where appropriate.

House builders should not get complacent and think they have no problem if there are no Red Reportable Items. It will be just as important for house builders to ensure that all other steps in the NHBC’s revised system and not just those relating to the pre-handover inspection are followed. These include:

  • registering homes at least 21 days (or 8 weeks in the case of hazardous sites) prior to the commencement of work;
  • providing all relevant information and correctly completing all documentation. Outstanding information will inevitably delay the issue of the Buildmark Cover Note;
  • giving renewed notice to an NHBC inspector before a repeat inspection can be undertaken where a home fails a pre-handover inspection;
  • efficiently processing the Buildmark Cover Note once issued to ensure it is received by or on behalf of the buyer at the earliest possible time;
  • having appropriate systems in place and availability of appropriate trades so that site managers can ensure that the work necessary to deal with Green items are carried out within a reasonable period of time, notwithstanding the issue of the Buildmark Cover Note.

Zurich Municipal

Inspectors operating Zurich Municipal’s warranty scheme will have a similar ability to issue cover notes on site. These will be uploaded overnight and generate the automatic issue of the full warranty certificate.

Zurich Municipal similarly requires the home to be ready when they arrive to give a final inspection. By this they mean that the home is complete, it complies with building regulations, it meets health and safety requirements, it is fit for occupation and has no potentially claimable items outstanding.

Zurich Municipal is, however, not proposing to operate any comparable scheme to the NHBC’s scheme of Red and Green Reportable Items. Items may be endorsed out of cover and require a re-inspection before being admitted to cover. Where a repeat final inspection is required Zurich Municipal will aim to return on site within 72 hours but cannot guarantee this.

If the buyer's solicitor's or licensed conveyancer's details are available they will receive the buyer's and mortgagee's copies of the warranty certificate directly and the house builder will receive their own copy. Where no details are available, the house builder will receive all copies for distribution.

This Bulletin was produced by the Davies Arnold Cooper Property Group, the partners of which are:

  • PeterHanson
  • Ian Hunter
  • RobertLee
  • Paul McCartney
  • John Nelmes
  • Loretta Peddell
  • Chris Rees
  • David Roberts

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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