Very Smart People. August Evaluating Flood Risk: Buyers and Lenders.

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1 Very Smart People August 2013 Evaluating Flood Risk: Buyers and Lenders

2 Index What is the concern? 1 Availability of Flood Insurance 1 Types of flooding 2 Flood risk assessment information 3 Recommendations 7 Final warnings 8 Contact us 9

3 What is the concern? It is estimated that 5.8m properties in the UK are at some risk of flooding and the chances of it happening are increasing. If your property is affected you may not be able to secure insurance for the property either at a reasonable cost or at all. If your property is not insured or too expensive to insure then you may not be able sell or obtain a mortgage on it. If your property is flooded but uninsured then you will pay the cost of remedying any damage or destruction caused. Availability of Flood Insurance now and in the future The Government and the Association of British Insurers work together to make a scheme of flood insurance available and affordable for residential occupiers facing the highest risk of flood damage. The last scheme ended in July 2013 and discussions are continuing to put in place a new scheme. The current proposed scheme will exclude commercial property, residential properties in Council Band H and those built since 1 January The current proposed scheme also provides for benefits to be phased out in years for high flood risk properties. 1

4 Types of flooding Flooding risk may not always be obvious and flood risk has a potential impact on all those owning or occupying property and the Lenders providing finance to Buyers to acquire property. The different types of flooding are: Surface water Drain and sewer Groundwater River Coastal Broken water mains flooding (burst water mains can cause flooding underground and to basements of properties). 2

5 Flood risk assessment information On acquisition of property for the Buyer Your solicitor is not qualified to give advice on flood risk or to interpret technical flood reports. However you can expect your solicitor to provide you with information to help you to investigate the terms on which buildings insurance cover is available prior to you entering into contract to purchase your property. This will be general information in relation to searches and other means of investigation, for instance enquiries of the seller. You should be encouraged to ensure that you can obtain insurance for the property on acceptable terms prior to entering into contract. You should seek several quotes for insurance detailing not just the cost of the insurance but also what is covered. Read the detail of proposed policies carefully. You are encouraged to instruct a valuer or surveyor to carry out a physical inspection, survey or valuation generally and to provide advice on the impact of flood risk. If you are acquiring a leasehold property then it is more likely that it will be either the freeholder or landlord or a management company that will be responsible for insuring the building. In this event you will need to review carefully the wording of any lease to establish the extent of the obligation to insure. Is this obligation linked only to "insured risks", or "excluding risks that are not insurable on reasonable terms..." If so, it could be that in the future insurance to cover flood risk is not maintained. If a flooding event occurs and there is no insurance in place then you will have to pay to repair damage or destruction, as may be appropriate, through either the obligation to repair the property placed on you or the obligation to pay the service charge. You should also be satisfied with any obligation regarding the discharge of any environmental concerns at a property which may be passed to you by either the seller or the freeholder or landlord or management company. General references could include liability to deal with flooding. You will want your solicitor to negotiate carefully any liability for environmental concerns. You should perhaps consider including in that negotiation a consideration of which party will be liable for flooding should this occur at the property. If you plan to let or lease the property subsequent to purchase you will need to ensure that the terms of any obligation to insure and the responsibility for flood risk are on an acceptable basis. Similarly if the property on acquisition is to be redeveloped and then sold you will need to ensure that the new build properties created can obtain insurance on reasonable terms and cost for flood risk. You should consider the same matters in relation to any property to be acquired with the benefit of existing tenancies or leases. 3

6 If redeveloping the property on acquisition you may need to consider the installation of flood protection measures as part of construction so as to mitigate any flood risk which in turn may make it easier to obtain insurance for future flood risk on reasonable terms and cost. If any redevelopment of the property is being carried out by a third party you should consider inserting terms in the development or building contract to adequately deal with the installation of flood protection measures and after the installation for the inspection of and guarantee of those measures. If the property to be acquired is newly constructed you should ensure that enquiries are raised with the seller regarding flood risk and any flood protection measures installed at the property and that you are satisfied with the answers given. On the mortgaging of property for the Lender Lenders will have their own insurance and other requirements to be met by the owners of the property. As Buyer, you may also have additional obligations to perform as Lenders are increasingly likely to investigate the potential flood risk of prospective property security either as part of their valuation process or by requiring additional searches to be done. You are unlikely to find any express obligations regarding flooding within a Loan Agreement but you will find an obligation to insure the property, often particularly against flood risk, within the mortgage document. Upon the Buyer purchasing the property with the aid of a mortgage or simply upon creation of a mortgage on the property the Buyer will be under an obligation throughout the length of the mortgage to insure the property or to ensure that the property is suitably insured via a party i.e. freeholder or landlord or management company. The Buyer will need to consider whether or not, and at what cost this can be achieved and whether the terms of the insurance obligation are acceptable to it. The Lender will rely on a Certificate of Title being provided to it by either solicitors acting on behalf of the Buyer or itself when granting a mortgage. The form of certificate may be in standard Law Society format or in a format tailored by the Lender to deal with its concerns. Most Certificates of Title do not expressly request a disclosure as to the flood risk of the property. However there will be a number of disclosures regarding flooding that would have to be made against statements such as "good and marketable title", "no adverse liability", appropriate searches". It is for each of the individual solicitors providing the Certificate of Title to the Lender to determine what is disclosed. The City of London Certificate of Title specifically includes an exclusion "this certificate does not consider any environmental or flood assessments, audits, surveys or other reports on the environmental condition of the property and the recipient of this certificate should consider what investigations it wishes to make in relation to those matters". This exclusion is not generally repeated in bespoke Certificates of Title. You may find that 4

7 regardless of the Certificate of Title used, Lenders will increasingly request more information on environmental matters, including flooding. General references within either loan and mortgage documentation and Certificates of Title to environmental matters may also include flooding although it could be argued that a risk of flood is not an environmental matter until the flooding actually occurs. It would be appropriate in the drafting of documentation to put the issue beyond doubt and to ensure for the Lender that the Buyer is responsible for flood risk throughout the life of the loan. Common to both Buyer and Lender in either acquisition or mortgage of the property There are a number of ways to obtain information regarding flood risk, the main ones being: Search of The Environment Agency Flood Map Land Registry Flood Risk Indicator Screening Reports Commercial Searches Some of the searches are free and some information is limited. The more detailed searches will categorise the level of risk, usually into: Low or Negligible Risk 1 in 1,000 years Low to Moderate Risk 1 in 200 years but at a depth of less than 30cm Moderate Risk 1 in 200 years but at greater depth up to 1m High Risk 1 in 200 years but at greater depth over 1m Significant Risk 1 in 75 years The searches will also detail the risk level per type of flooding and therefore a property could have a low risk for one type but a moderate risk for another type. In addition, these searches might also provide a statement as to whether or not in the search provider's opinion the property can be insured at standard terms. At present there are different types of searches available with marked variations in cost, quality, range, analysis and interpretation of data. It is a question of selecting the best search or searches to suit the Buyer or Lender and in respect of the individual properties involved. A general environmental search may also provide some limited information about flood risk. 5

8 If flood risk is a highlighted concern within your environmental search then we would recommend that a more detailed commercial search is obtained. However, careful consideration is always needed in respect of the terms and conditions of any search, including any limits or exclusions on the liability of the provider of that search. In addition, both the Buyer and Lender will be relying on a valuation and or survey of the Property to be bought or mortgaged. Both the Buyer and the Lender will want the reports provided to them to contain information about potential flood risk. It is however common for reports to exclude liability for undertaking any review or to express any opinion in respect of flood risk unless the same is revealed by a Certificate of Title being given to the Lender or as a result of a special instruction by a Lender or Buyer. Going forward you may want to consider giving specific instructions on the issue of flooding and always consider the limitations or exclusions of any report. Specialist surveys can also be requested where necessary. A flood risk survey or report provides information not only about the likely risk of flooding but also about what steps can be taken to mitigate exposure to flood damage including analysis of the efficacy of existing flood mitigation measures. The existence of detailed information and flood mitigation measures on or at or protecting a property can be persuasive for an insurer to provide insurance for flood risk where this otherwise may not be available or prohibitively expensive. Whether and to what extent flood protection measures are necessary will depend on the degree of flood risk and the vulnerability of the property, its operations, or occupants to the effects of a flood. There are many different flood protection products on the market (including sandbags, plastic covers to seal airbricks, plastic skirts to surround whole properties, temporary free standing barriers to protect groups of properties and floodgates) and you should look for products that have been awarded the BSI Kitemark as these will have been independently tested and proved fit for purpose. You would also wish to ensure that any measures have been correctly installed by engaging an appropriate engineer to inspect and report to you. This will also provide comfort to a Lender deciding whether or not to grant a mortgage to the Buyer of a property. 6

9 Recommendations On acquisition for the Buyer Make sure you have sufficient depth and detail of the flood risk which affects the property you are intending to acquire, including details of any flood protection measures which the property may benefit from. Ensure that you have an offer of insurance cover against the risk of flooding from a suitable insurer to place on risk upon completion of your purchase of the property. If you are not required to insure the property ensure that your freeholder or landlord or management company has appropriate insurance on the property and is obliged to maintain such insurance on terms and cost reasonable to you and the freeholder or landlord or management company contained in the lease of the property. If you intend to dispose of the property make sure that you are able to provide insurance cover or that your purchasers can obtain insurance cover for flood risk on reasonable terms and cost. Be satisfied with the scope of services to be provided to you by your surveyor and valuer and ensure that this requires them to report to you on flood risk. If you intend to develop the property or the property is newly constructed please consider which flood protection measures to install or are installed at the property. On the mortgaging of property for the Lender Be satisfied with the scope of services to be provided to you by your surveyor and valuer and ensure that this requires them to report to you on flood risk. Be satisfied with the terms of the loan and fixed charge obligations to ensure that flood risk insurance is maintained on the property throughout the length of the mortgage. You may wish also to put in place a regular reporting requirement to check that flood risk is an insured risk on the Property's insurance policy and monitor the cost and terms of that insurance. Perhaps you would go as far as seeking the ability to call for substitute security for your loan in the event that a property became uninsurable. Determine through the Certificate of Title being provided to you that the level of information is appropriate on the flood risk which affects the property. Be able to evaluate and determine whether to grant a mortgage on a property based on available information on the flood risk, assessment and the adequacy of any flood protection measures which the property has the benefit of and the terms and cost of the current or intended insurance policy on the property. 7

10 Final warnings Keep an eye on what happens to the provision of information and the terms, conditions, exclusions and liability in respect of searches in relation to flooding on properties to be purchased or to be mortgaged over the next year or so. The details may well change, especially in respect of commercial properties, properties in Council Tax Band H and residential properties built after 1 January You need to place reliance on the right search for your transaction. If you rely on block insurance policies you may wish to speak now with the insurers to determine what their future attitude to covering flood risk will be if the proposed scheme being considered by the Government and ABI is agreed and seek alternative insurance or put in place another solution, if necessary. In respect of any insurance policy at each annual renewal do check the terms of the policy as well as the cost of renewal to ensure that the nature and cost of the cover in respect of flood risk is not changing significantly. If it is you may have to seek alternative insurance quotes. If your property does lie in a high risk area as a Buyer/owner you should communicate with your neighbours and other occupiers of property in the area to obtain more information about flood risk to the area. You may look to see if there is a flood action group to belong to or you might be interested in setting one up. You might also work with or take part in public consultations held by the local authority or Environment Agency in respect of plans for the area in which the property exists. If there are plans to try to reduce flood risk in your area then holding details of the level of protection that scheme offers and to be involved in the formulation or refinement of any plan increases your knowledge of the risk which in turn should help you obtain insurance cover for flood risk. As Lenders become more aware of the increasing likelihood of insurance for flood risk being limited or too expensive you will need to ensure that you have sufficient information on the flood risk for a property, whether any flood protection measures have been installed and that insurance cover for the property is in place at not only the outset of the loan or property being mortgaged but also during the period that reliance is being placed on that property as security for the loan. 8

11 Contact us For further information, please contact: Wendy Wilks Partner, Housing & Care Direct Line