Severely Weakened HIPs.

Home Information Packs, or HIPs, will be introduced in June next year. We examine the implications for property professionals.

The National Association of Estate Agents, 125 cross-party MPs, the Council of Mortgage Lenders, and "Location, Location, Location" presenter Kirstie Allsopp - hardly a revolutionary force, but ultimately successful in forcing the Government to u-turn into removing the Home Condition Report (HCR) from the forthcoming Home Information Pack (HIP).

On 18 June, Yvette Cooper, Minister for Housing and Planning, announced that HCRs would no longer form a compulsory element of the HIP in June 2007.

Whilst the Department for Communities and Local Government (DCLG), the new government department charged with introducing HIPs, clings to the belief that HIPs will still engender greater transparency in a speedier property selling process, without its most controversial and essential element, the HCR, the HIP appears to have been seriously weakened.

What will be included in the 'replacement' HIP?

From June 2007, the compulsory element of HIPs will be restricted to title deeds, searches and an energy efficiency assessment. The energy assessment, which is required by EU law, will provide buyers with A-G ratings on their homes as well as a list of practical measures to cut their fuel bills and carbon emissions.

This is a marked change to the compulsory requirements set out by the Government in June 2006 in the HIP Regulations (The Home Information Pack Regulations 2006, Procedural Guidance and Certification Scheme Business and Technical Standards documents) which required: terms of sale; evidence of title; replies to standard preliminary enquiries made on behalf of buyers; copies of any planning, listed building and building regulations consents and approvals; for new properties, copies of warranties and guarantees; replies to searches made of the local authority; and an HCR, including an energy efficiency assessment.

Why the u-turn?

Since first mooted in 1997, the HIP has been the subject of much criticism. The "anti-sellers pack" campaign argued that the HIP would be too costly (at between [pounds sterling]600 and [pounds sterling]1,000), that they would be mis-used to pressurise buyers, that the HCR would prove to be a box-ticking exercise on which few buyers would rely. They also voiced concerns in relation to the standard of Home Inspectors. The Council of Mortgage Lenders warned that many lenders would still seek separate mortgage valuation surveys from buyers as HCRs omitted vital information (e.g. on subsidence).

The Government announcement states simply that the industry is not ready for HCRs: "the latest information casts doubts on the readiness of the industry to be able to pass on the benefits to consumers from next June. There are concerns about the number of home inspectors who will be in place in time. In addition evidence from the Council of Mortgage Lenders shows that many lenders will not be in a position to make maximum use of Automated Valuation Models which will support the use of the Home Condition Report. The Government is keen to avoid risks to consumers from industry delays and potential late changes to the implementation timetable next year."

The Government appears to have overlooked the fact that nearly 4,500 Home Inspectors are nearing qualification, and that property companies such as Rightmove have already invested millions in preparation for HIPs.

What happens now?

Unsurprisingly, the director of the Association of Home Information Pack Providers expects that "there will be consumer demand for the HCR and it will become mandatory". Furthermore, a spokesman for the DCLG told the BBC that "The first stage is to see how they work on the ground. This is not a u-turn. We are bringing them in on a phased basis...It's about the timetable for bringing them in".

The less effusive government statement suggests that "Mandatory introduction of Home Condition Reports remains on the table, however the Government wants to encourage market led take up first, in order to allow a more flexible roll-out that responds to consumer demand and the results of further testing. The Government will urgently review with key stakeholders what support is needed to ensure that there are sufficient home inspectors in place, and that consumers are fully protected."

Meanwhile, the Government's dry run of HIPs, launched in June 2006 and continuing into the autumn of 2006, will form the basis of any future developments. However, such trials may be of limited value as reports suggest that of 14,000 dry-run HIPs produced to date only around 250 have contained HCRs. The industry is therefore left in something of a state of flux.

Potential liability arising from HCRs

The Government announcement, and the low production of HCRs in the dry run, indicate that once feared impending liabilities arising from the introduction of HIPs will be curtailed.

However, some of the Home Inspectors expected to qualify soon may still find their skills applied in relation to voluntary HCRs (and more so should the Government re-discover its enthusiasm to make HCR compulsory).

Home Inspectors will owe a duty of care and be liable in negligence to the buyer, seller and mortgagee in relation to the HCR that they produce. The concern of many in the property market has long-since centred on the level of reporting in the HCR and the potential increased exposure to related professional indemnity claims. The Law Society, in particular, questioned the quality of training and regulation of Home Inspectors. Despite the government certification scheme which to date has seen the qualification of around 450 Home Inspectors, they do not need to have previous experience of property inspections. In circumstances in which HCRs are produced, insurers will need to assess carefully the potential risks posed by Home Inspectors.

In an attempt to ease the fears of surveyors and others involved in the property market, the Government had stated that this is unlikely to cause an increase in surveyors' professional indemnity insurance premiums; however, this will presumably depend on whether, and how, claims arise.

On that basis, it is still necessary to examine the elements of the HCR and the potential liabilities for property professionals arising out of the preparation of such a report.

The HCR is proposed to be in a standard format, made up of the following:

Section A: terms of engagement, describing the extent of the inspection and describing the parts of the property that are outside of the inspection requirements;

Section B: general information about the property, its age, size, accommodation and re-instatement cost for insurance purposes;

Section C: matters that may require further consideration by a conveyancer e.g. environmental issues needing further investigation;

Section D: the condition of the exterior of the property;

Section E: the condition of the interior of the property;

Section F: details in relation to the services that are connected to the property;

Section G: outbuildings, grounds, boundary walls and fences; and lastly

Section H: report on the energy performance of the property.

In order to limit potential exposure, Home Inspectors will still need to consider extremely carefully Section A of the HCR to ensure that they have included any necessary caveats as to the extent of their inspection. In relation to Section C, Home Inspectors will need to examine closely those matters observed during the inspection that may require further investigation, e.g. rights of way and environmental issues such as flood risk, in order to avoid potential exposure for failing to properly identify such issues. In any event, liabilities may arise from the preparation of the compulsory energy assessment.

Conclusion

Although the Government has performed a dramatic u-turn, the HIP issue appears unlikely to disappear. Even in its new "half-HIP" format (to quote consumer group Which?), some (if limited) potential exposure remains. We will provide an update on any developments in future editions of this briefing.

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.

Mr Simon Konsta

Barlow Lyde & Gilbert

Beaufort House

15 St Botolph Street

London

EC3A 7NJ

UNITED KINGDOM

E-mail: [e-mail]

URL: www.blg.co.uk

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