In my last blog, I began a ‘compare and contrast’ of the NHBC (and other insurance backed structural warranties) and collateral warranties/third party rights. We previously looked at what (i) each type of protection did; (ii) the parties/stakeholder that would benefit from each type of protection; and (iii) who they were aimed at. In this blog, we will look at the drawbacks of each type of protection.
Potential issues with NHBC
The NHBC offers a certain level of long term, easily transferable protection to homeowners. However, there are issues that arise in the robustness of the protection being offered. From 0-2 years after practical completion, the builder is required to come on site and remedy defects notified by the homeowner itself (the ‘builder warranty period’). The problem with this is what happens if the builder won’t play ball (i.e. refuses to come on site). If this happens, the homeowner potentially has a significant amount of administration to do using either: (i) the NHBC resolution service; or (ii) to obtain a court judgment/arbitration award in order to resolve its issues. Whilst the beneficiary of a collateral warranty/third party rights notice might also have the same trouble getting the contractor/consultant to come back to site, this protection will at least be provided to third parties for (most likely) no fee.
During the ‘NHBC warranty period’ (i.e. years 3-10 post practical completion), the insurance backed cover only protects against damage to certain parts of the premises; there an excess to pay for each claim and there are limits on the amounts that can be paid out under the policy. There is a common assumption that NHBC cover will provide the homeowner with protection in the event of any kind of defect to the building. This isn’t the case as it provides structural protection only. Damp which doesn’t impact the structure wouldn’t be covered for example. So, any damage which is non-structural or only impairs decorations wouldn’t be covered. Repairs to heating systems and any M&E works are also not covered, neither are consequential losses such as financial losses.
If it is required to repair a defect, the NHBC is only required to repair it to NHBC standard. On many developments where robust appointments and building contracts are put in place by lawyers, the threshold of what a ‘defect’ is under the NHBC policy will most likely be lower than those included in the suite of construction documents.
Anecdotally, we also understand that the NHBC can have a reputation for being inflexible with the construction methods that it expects to be used on the developments it insures.
Potential issues with collateral warranties/third party rights
You can expect collateral warranties/third party rights to offer a wider form of protection than the NHBC structural warranty. This is because these documents warrant everything that is included in the underlying contract to which it relates (i.e. the building contract/consultant appointment). Provided you have a good suite of construction documents in place, you will have more certainty as to what is covered under your warranty/third party rights notice. Also, warranties and third party rights will generally have limitation periods of 12 years from the date of practical completion and will be provided for free by the professional team.
However, if the builder becomes insolvent the chances of recovery under its collateral warranty is almost nil. The NHBC in contrast does provide some form of cover in these situations (limited to £100,000 or 10% of the purchase price (whichever is lower)).
Also, it is very important to remember that your warranty/third party rights notice is only as good as the underlying contract so it is crucial that you ensure that this document is robust. There may also be limitations on liability included in the appointment, warranty or third party rights notice so beware of these as they may impede on your ability to claim the full amount necessary to remedy any defect/breach of contract.
In contrast to third party rights (where costs in producing these are much lower), the costs of the administration of agreeing forms of warranty and getting them executed properly can build up. Spending money up front incorporating third party rights into contracts can therefore pay off in the long run (especially in cases where providing long lists of warranties are pre-conditions to completion).
The NHBC (or other structural warranty provider – anecdotally we’ve just had a good experience with Buildzone) are almost essential these days for new residential homes. However, they do not provide the breadth of protection that is afforded under a decent set of construction contracts and related collateral warranties/third party rights. In cases where there are other stakeholders involved in developments (such as funders, the council, private landlords etc) these parties will most likely require a comprehensive set of collateral warranties/third party rights notices as their own protection.