MORTGAGE LENDERS have introduced legal clauses that prevent high rise tower blocks from ‘being used as security’ on housing association loans, contingent on an external wall fire review (EWS1) certificate being provided.
Inside Housing reported on the news that lenders ‘now require social landlords to agree to legal clauses that state high-rise buildings cannot be used as security for loans’, while asking for EWS1 forms or ‘refusing them altogether as loan security for fear of them becoming devalued if fire safety works are required’. The news outlet spoke to lawyers who outlined issues facing housing associations ‘as fire safety defects have been discovered on thousands of properties’ post Grenfell.
Saghar Roya – a partner specialising in securitisation at Devonshires – said she had seen deals where ‘lenders have requested the loan documentation included a “condition precedent” stipulating that any properties used as security will not comprise of high-rise buildings or, if they do, that they comply with fire safety regulations with a completed EWS1 form’.
She added that without a solution, registered providers risk holding on to ‘redundant stock’ that can’t be borrowed against and ‘could lead to a shrinking portfolio with which to access funding’, adding: ‘This isn’t a high concern as yet, but this may change in the next year or two if regulations keep changing and more specific guidelines are not introduced.’
Katie Dyer, partner at Trowers & Hamlins, said in turn: ‘We have seen an increase in condition precedents in new loans requiring confirmation from registered providers. Where a funding arrangement predates EWS1 requirements and new security is being put in place, funders are increasingly requiring an officer’s certificate from the registered provider requiring confirmation of an EWS1 is in place for any property that is over 18m.’
Inside Housing noted that while the government had introduced £3.5bn in further cladding remediation funding last week (https://www.thefpa.co.uk/news/the-fpa-responds-to-government-funding-to-replace-unsafe-cladding), housing associations ‘will only be able to access funds for its leaseholders and shared owners’. Ruby Giblin, partner at Winckworth Sherwood, pointed out that with EWS1 requirements, where landlords are looking to put ‘into charge’ new properties with fire safety defects, ‘pretty much all lenders will say no’.
She added that for properties already in this status that require remediation, some lenders will subtract the costs of works from the building’s value, reducing the amount that can be achieved on loans, stating: ‘Revaluations happen every five years or so, and three years on from Grenfell the volume hasn’t been too much but it will increase, with some lenders indicating they may think again and consider covenants in the loan agreement.’
Finally, Susie Rogers – partner in the housing team at Capsticks – said housing associations were hoping the form would simplify the process as ‘a lot of registered providers have already charged the low-hanging fruit and are now having to deal with the more challenging units’.
Earlier this month, the Royal Institution of Chartered Surveyors (RICS) revealed that the training course it had developed to help train more people to undertake EWS1 surveys had seen 1,2000 registrations, with the form, introduced in December 2019, having aimed to ‘create a standardised process that would make it easier for brokers and homeowners to find suitable mortgages’.
A valuer could request it from a building owner or representative, and require a professional ‘confirm that the actual material on the walls posed a limited risk or was non-combustible’. Should it contain materials that ‘posed a significant fire risk’, a ‘detailed description of what was needed to fix it had to be issued’, but lenders began rejecting mortgage applications.
This was because of ‘outstanding cladding inspections trapping borrowers with their current providers’, and so applications were being cancelled due to inspection requests being delayed. As a result of government advice ‘a much larger number of buildings’ fell into scope ‘than had been envisaged’, and the process ‘lacked sufficient input from leaseholder representatives, but also other important stakeholders, including the insurance industry’.
RICS urged the government ‘to take greater ownership of the situation’, and Minister for Fire and Building Safety Lord Greenhalgh held talks with RICS to ‘attempt to resolve confusion’. Then, Housing Minister Christopher Pincher stated mortgage lenders are reviewing how the forms are used, though some residents have been told by housing associations that they ‘cannot produce’ the form for possibly ‘several years’.
He later admitted that there are ‘fewer than 300’ qualified chartered fire engineers to undertake the surveys. In late August last year, Which? revealed leaseholders are ‘being duped into paying thousands’ to fraudsters using fake forms, and the crisis saw mortgage brokers report ‘delays and scuppered plans’ for clients.
The Fire Industry Association launched a portal that will ‘provide a central readily-accessible location for EWS1 forms’ and allow fire engineers to complete forms online. After this, the Financial Conduct Authority (FCA) reported that the government and banks are working on a more ‘risk-based’ approach to assessing properties with cladding.
More recently, Mr Pincher ‘refused to acknowledge’ any role in the issues stemming from government guidance, stating that the Advice for Building Owners of Multi-storey, Multi-occupied Residential Buildings guidance – released in January – ‘was written for building owners to ensure the safety of their buildings. It was not designed to be used for valuation purposes’.
In late November, Mr Johnson ‘slammed’ mortgage lenders for use of the form, but ‘failed to promise that leaseholders would not have to pay for cladding removal’, and in December the director of delivery at the Conveyancing Association (CA) revealed that the results of EWS1 surveys can be hidden if administrators want them to be.
Also in November, the government announced it would help homeowners by ensuring that owners of flats in buildings without cladding ‘will no longer need an EWS1 form to sell or remortgage’, as part of an agreement the government claimed it had reached with RICS, UK Finance and the Building Societies Association (BSA).
However, UK Finance and the BSA ‘did not consent’ to being part of the announcement, which said EWS1 forms ‘are not and have never been required’ for buildings without cladding. A finance industry source also said the proposal ‘did not mean properties with issues other than cladding would automatically be exempt’ from an EWS1 survey.
Buildings with wooden balconies and other issues ‘should have been included among those which still required’ external fire safety checks, and it would depend on the decision of a ‘suitably qualified, independent and properly insured surveyor’. The UK Cladding Action Group also pointed out that only a ‘small subset’ of buildings would benefit.
The UK mortgage industry added that this ‘does not solve the problem’ and that it ‘it changed nothing’ for buyers or sellers. In October, Mr Johnson had revealed that a reassessment of the form was being undertaken by RICS, after the housing, communities and local government committee (HCLGC) had, last year, branded the form ‘slow and expensive’.
In January, a report from consultants Capital Economics found that around 1.27m flats in England ‘could be unmortgageable’ due to combustible cladding concerns. The consultants added that ‘if it was to be assumed’ that the government’s November statement in relation to EWS1 not applying to certain buildings ‘made no difference to the behaviour of lenders’, complications ‘could affect’ all buildings taller than 11m or three storeys.
More recently, RICS launched a consultation on new guidance that aimed to ‘clarify’ buildings that are required to undertake an EWS1 survey, and to ‘significantly’ reduce the number of properties requiring one. The guidance ‘looks to clarify’ building types that surveyors and mortgage lenders ‘should demand’ an EWS1 form for before the sale or purchase of apartments.
Most recently, RICS said that the government’s plan to provide indemnity insurance for professionals for fire safety assessments as part of its new cladding funding announcement ‘will ease current bottlenecks’.
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