New build
Last reviewed 27/11/2008: any recent updates in this colour.
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Press coverage and other reports have highlighted that the valuation and price paid for new-build properties, especially flats, may not be transparent because of sales incentives offered by the developer. Typical examples are discounted purchase price, cashbacks pre or post-completion and marketing allowances. If incentives are not clear and taken account of in the valuation, then the lender may not be lending on the true value of the property. We have been discussing this issue with relevant lenders and valuers.
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Lenders can ask applicants to declare on their application form any incentive or discount they are being offered by the developer. Lenders are able to reserve the right to vary or withdraw an offer if it subsequently emerges that there was an incentive or other discount that was not declared.
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It is essential that the valuer is aware of the full details of any incentives being given. When lenders instruct valuers, they should pass on any information held. If an intermediary has instructed the valuer, then they should pass on details of the incentives. If it becomes apparent that the valuer was not aware of the position or the solicitor reveals the nature of the incentive after an offer has been issued, the valuer should be asked if the incentives affect the valuation provided.
The valuation advice is guided by the Royal Institution of Chartered Surveyors (RICS) 'Red Book' of standard instructions to valuers. A copy of the updated guidance under section 5.5 of appendix 3 is attached. This has been amended by RICS in conjunction with the CML to reflect concerns. The updated guidance emphasises the need for valuers to consider the effect of any sales incentives which could have had a distorting effect on the agreed sale price. Valuers may also need to look for comparable evidence beyond the immediate development. If there are concerns that valuers have not been valuing in accordance with the Red Book, this should be taken up with the RICS.
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The Lenders' Handbook provides comprehensive instructions for conveyancers acting on behalf of lenders in residential conveyancing transactions. Section 6.3 of the Lenders' Handbook for England and Wales sets out what is expected of the conveyancer in respect of the purchase price. It provides that, unless specifically instructed by the lender (in its part 2 instructions), the purchase price for the property must be the same as set out in the instructions. If it is not, the conveyancer must tell the lender.
The conveyancer must also (if required to do so in part 2) tell the lender if the conveyancer becomes aware of any arrangement under which
- there is a cashback to the buyer
- part of the price is being satisfied by a non-cash incentive to the buyer
- there is an indirect incentive (cash or non- cash) or rental guarantee
Such arrangements may lead to the mortgage offer being withdrawn or amended.
The conveyancer must also tell the lender if he will not have control over the payment of all the purchase money (for example, if it is proposed that the borrower pays money to the seller direct) other than a deposit held by an estate agent or reservation fee of not more than £1,000 paid to a builder or developer.
The Law Society has produced guidance for it members on mortgage fraud, which states that a solicitor is under a duty to inform the lender of the true price being paid for a property. This includes not only informing the lender of straightforward price reductions, but may include other allowances which amount to a price reduction. The examples given in the guidance include incentives offered by builders such as free holidays and part-subsidisation of mortgage payments.
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CML Disclosure of Incentives Form
The CML has been working with lenders, valuers and developers to improve transparency through a new form – the CML disclosure of incentives form – required for all transactions on newly built, converted or renovated properties.
The CML Disclosure of Incentives Form will detail all incentives and discounts offered by the developer. The developer will complete the form and provide a copy to the lender’s conveyancer and to the valuer.
Lenders will amend their instruction in section 6.3.1 of part 2 of the Lenders’ Handbook to make the receipt of a CML disclosure of incentives form a pre-requisite to the completion of the conveyancing process. An article outlining how the process will work is attached.
The RICS have announced that they will be making further changes to the ‘Red Book’ that will require valuers to inform the lender if they have or have not received a copy of the form.
The Home Builders' Federation and Homes for Scotland support the CML changes and have already amended their individual codes of conduct, to encourage greater transparency amongst their membership. And a number of major builders have responded by taking individual steps to address this issue.
Changes to the Lenders’ Handbook and the RICS Red Book will be implemented on 1 September 2008 and will apply to conveyancing instructions given after this date.
The CML Disclosure of Incentives Form and a frequently asked questions document, produced jointly by the CML, RICS, HBF and HFS are available from this webpage.
The frequently asked questions document explains the reasoning behind the development of the CML Disclosure of Incentives Form, who it should be completed by, who should receive it and when. It is designed to be relevant for all parties (developers/sellers, valuers, solicitors/conveyancer and lenders) and should be read with this in mind.
Both documents are also available from the Lenders' Handbook.
We have been made aware of a scam that is designed to subvert the form by not disclosing a third party payment/finder's fee. The scam relies upon the manipulation of an 'option to buy' contract between a developer and a third party.
The CML, HBF, HFS and RICS have amended the frequently asked questions document to encompass this. Our respective members have been alerted to this scam and we have contacted the Law Society and the Council of Licensed Conveyancers.
