NewBuy Guarantee Scheme – Is this really going to fix the broken property market ?

Earlier this month to great trumpeting from No 10, and following numerous pre-announcements the Government launched its NewBuy Guarantee Scheme.

The scheme is intended to be the solution to kick-starting the ailing property market.

The theory being that the whole market is stalled because first time buyers can’t raise sufficient deposits or borrow sufficient mortgage funds to get on the property ladder in the era of tight lending conditions following the credit crunch. Without sufficient first time buyers the whole house moving market can do no more than limp along at its current low levels of activity.

The government is desperate to repair the damaged market because a properly functioning transactional market would do much to improve the economic situation of the country as a whole.

How does the scheme work ?

House builders pay to the mortgage lender 3.5% of the purchase price on a new- build property while the government provides an additional guarantee of 5.5%. This is meant to encourage the mortgage lenders to lend to people with lower deposits on a higher loan to value basis at a reduced risk. The government suggests that this will help 100000 first-time buyers onto the property ladder who would otherwise have been frozen out by tight lending requirements.

Will this scheme deliver the return to normal business that housing minister Grant Shapps predicts. Unfortunately, I suspect not.

Looking first at the numbers, normal transactional volumes pre credit crunch were around 1.5m housing transactions p.a. , post credit crunch we are seeing volumes nearer the 900,000 level. Even taking the governments predictions at face value (i.e. assuming that there are 100000 first time buyers all waiting to buy new build houses all of whom will suddenly become eligible to buy) 100,000 new first time buyers in the market is not going to have a significant impact in improving the overall transaction levels. The best you will see is a 10% increase which will still leave the market trading at 30% or more down from its normal level.

Since the scheme only applies to new-build properties each of these first-time buyers is only going to be involved in a chain of one buyer and one seller. If the whole market is waiting for first time buyers to buy from the bottom of the chain so every one else can buy further up then encouraging first time buyers to buy from house-builders rather than private sellers is not going to help the rest of the market. In fact if anything the scheme will decrease first time buyer demand for private purchases and stagnate the rest of the market further

The property market got into trouble in the first place because we all borrowed more than we could afford on our properties. The intrinsic nature of the NewBuy Scheme is that we are encouraging mortgage lenders to lend more monies to individuals than they would otherwise consider it safe to do so. Is this really the solution to problem? Creating a short term fix by reintroducing the same bad habits that caused the mess in the first place.

My view is that the scheme is misplaced tinkering, and, as with much that the coalition has done in the last couple of years has been introduced more as a way of showing the people that it is trying to boost the economy rather than with any great expectation that it will do so.

Market economics will dictate when the property market will return to normal. This will happen as and when the lenders are capable of borrowing funds more easily and more economically, and when the consumers have more money in their pockets and therefore greater demand to buy.

Over the last 4 years I have been deluded as others into believing that there was something we could do to make lenders lend or to increase demand but I have reached the realisation that the housing market cannot be significantly manipulated by outside intervention (other than short term fixes) and that as with everything in economic cycles the market will return to normal when its good and ready.

NewBuy scheme – It’s good that the government are doing something to help a few but it is not going to have any major impact in improving the housing market in the short term

Are you ready for the changes The Localism Act will make to an unprotected deposit?

Of all the issues that confuse and cause problems for my Landlord and Agent clients “the deposit” is definitely top of the list.

The goalposts have continually been moved by a number of decisions and the government has finally starting to resolve the problems posed by these cases that have radically amended the original legislation. The Localism Act will come into force around the 6th April 2012.

In particular the decisions in two cases the new Act will seek to change are those in: –

Tiensia v Vision Enterprises Limited (t/a Universal Estates) where it was decided that a Landlord can protect the deposit any stage, even if more than 14 days have elapsed since it was received, without penalty as long as they do so before the case comes to court.
And

Gladehurst Properties Ltd v Hashemi in this case it was decided that the Tenant could not bring a claim for an unprotected deposit at all once the tenancy was over.

The Localism Act will have the effect of overriding these decisions and closing a number of loopholes exposed by the courts.

Under the old provisions the Landlord is obliged to protect the deposit and provide the prescribed information to the Tenant and any relevant person within 14 days of receipt. Under the new legislation this will change to 30 days from the date of receipt.

The decision in Tiensia and Hashemi will no longer assist Landlords and their Agents in that if they fail to protect the deposit within the 30 day period, they can do so before the hearing to avoid the penalty. Where a Tenant issues proceedings for the Landlord's failure, he will still succeed notwithstanding that the Landlord secures the deposit before the hearing. A Tenant will also be able to issue proceedings for the Landlord's failure after the tenancy has ended.

However, it is not all doom and gloom for the Landlord, compensation for failure which is currently three times the value of the deposit will also cease. The court will have a discretionary power to award a penalty between one and three times the value of the deposit.

A reasonable Landlord who protected the deposit as soon as they became aware will be penalised less than a Landlord who has simply ignored the legislation, although it will never be less than one times the deposit.

Some of the decisions in Tiensia and Hashemi have not changed. For example there is no change in the definition of deposit or restriction on taking property as part of the deposit instead of money .

Therefore, taking last month’s rent in advance at the start of the tenancy will probably be regarded as a deposit. Also the obligation to serve the prescribed information properly and in full also remains unchanged.

Agents can still be sued for failing to protect the deposit in preference to the Landlord, however the new variable penalty will now allow courts to make an order against the Agents with the lower penalty if they were not responsible for registering the deposit.

It will also be necessary for any claim for an unprotected deposit to be commenced by all the tenants together and not by one acting without the consent of the others .

What does this mean for the service of a S21?

Where a deposit has not been registered and the prescribed information not sent to the tenant within 30 days if the Landlord wishes to seek possession it would appear that his only option is to hand back the deposit before serving notice.

We're not sure yet whether these new provisions apply to pre April 2012 tenancies and hopefully this will be clarified once we get nearer to the date.

So to all Landlords and Agents beware and make sure you look at your deposits and tenancy agreements and make sure that any deposit has been secured and the prescribed information sent to the tenant before the new Act comes into force.

Rita Wright

Chartered Legal Executive
Head of Undefended Debt Recovery
For more information please visit
www.breezeandwyles.com/debtrecovery

Only Firm in Hertfordshire with LEXCEL and ISO9001 accreditation

Breeze & Wyles Solicitors LLP is proud to announce that this week it has been recommended for registration to the ISO9001:2008 Standard.

The Standard recognises:

"Without satisfied customers, an organization is in peril! To keep customers satisfied, the organization needs to meet their requirements. The ISO 9001:2008 standard provides a tried and tested framework for taking a systematic approach to managing the organization's processes so that they consistently turn out product that satisfies customers' expectations."

Breeze & Wyles Solicitors LLP already holds the Law Society LEXCEL accreditation.

Martyn Bateman, the Practice Manager of the firm said: "I am very pleased and proud that Breeze & Wyles Solicitors LLP is the first Law Firm in Hertfordshire to achieve this dual accreditation. It demonstrates the high standards of service that our clients can expect from us. I must mention the staff of the Firm whose continuing efforts to produce that quality of service from day to day has allowed the firm to achieve this recognition."

You need tighter control on your overseas contracts

Business must take care when entering agreements with overseas organisations to avoid problems if disputes arise.

A High Court judge in London has been hearing a case that involved Brazilian companies who were in dispute over a contract covering the construction of one of the world's largest hydro electric facilities. The contract was for construction work in Brazil, it was governed by Brazilian law and was subject to the jurisdiction of the Brazilian courts.

But the dispute ended up in the English courts because parts of the original agreement were not precise enough, and the message to UK businesses trading overseas is to make sure they don’t fall foul of badly drafted contracts, particularly in emerging markets.

The contract in the Brazilian case said that any dispute had to be mediated and, if that failed, the dispute must be referred to arbitration in London. When the validity of the arbitration clause was challenged, the issue turned into a dispute as to whether the English courts or the Brazilian courts has jurisdiction to rule on the validity of the clause.

The judge ruled that the parties were obliged to arbitrate their dispute in London, and that English law applied to the arbitration.

The case has been highlighted as a clear lesson for anyone who has dealings with foreign companies. Whenever there is any foreign element, for example export of goods or foreign nationals as clients, the contract or terms of business must be clear about which country’s law will apply to the contract and which courts have jurisdiction. Any other details must then be consistent with the basic terms concerning the applicable law and jurisdiction.

Explained commercial law expert Brendan O'Brien of Breeze & Wyles Solicitors LLP: “The devil is in the detail. It is absolutely essential that the contract states the applicable law, because you need to be certain as to the effect of the terms - both at the time the contract is being drawn up and later if there is a disagreement. Otherwise you may find yourself in a very difficult position where your only option is expensive and difficult action involving foreign courts and procedures.

“If the contract says nothing, quite possibly the laws of another country might apply. And of course those laws might be quite different from ours. The situation is different for consumer contracts within the EU because consumers are protected by EU regulations.”

ENDS

This information is not intended as legal advice
Sulamerica CIA Nacional de Seguros SA & Ors v Enesa Engenharia SA & Ors [2012] EWHC 42 (Comm)
http://www.bailii.org/ew/cases/EWHC/Comm/2012/42.html

Struggling businesses dealt a double blow when landlords won’t let go

Hard hit businesses are being dealt a double blow as landlords refuse to accept break clauses when rents have been late, and experts are now warning companies to check the small print before signing new leases.

The alert follows a court ruling where tenants were left unable to end a lease because they had not complied with the small print on interest payments for late rent.

Commercial leases are normally granted for a specified period, such as seven years or fifteen years. A long lease gives security both to the landlord and to the tenant, but being able to end the lease early gives flexibility in case circumstances change.

That’s why many commercial leases contain a so-called ‘break clause’, which allows either the landlord or the tenant to terminate the lease early on an agreed date.

But the lease is likely to say that the tenant can only terminate the lease if the rent is paid up to date and all the other tenant obligations have been complied with.

This was the case in Avocet Industrial Estates LLP v Merol Ltd, where Merol’s right to end the lease early was on condition that all money due to the landlord under the lease had been paid at the break date. As tenants, Merol had often been late in paying the rent, and although it was up to date at the time of the break clause, the lease also stated that interest was payable on any rent paid late. Although Avocet had never demanded interest, when Merol tried to terminate the lease the landlord claimed that the tenant had lost their right, because interest had not been paid on the late rents.

Despite the interest amounting to just £130, compared with an annual rent of £67,500, the High Court judge came down on Avocet’s side, saying that the amount of interest being small made no difference and that the terms of the break clause should be strictly applied.

According to Hannah Collins, commercial property law expert with Breeze & Wyles Solicitors LLP, the ruling in this latest case comes as no surprise in current economic conditions.

Said Hannah: “This case may seem harsh, but although break clauses are becoming common, the right to end a lease early is still a privilege, so any conditions must be satisfied to the letter. In this climate, landlords want to hold on to tenants, so planning for break clauses needs careful thought - even before the lease is entered into.

“When negotiating terms with a landlord, it’s vital for a tenant to be sure that they are going to be able to comply with all the conditions – all too often we see a lease where the landlord goes for a general catch-all clause that is almost impossible to meet, as compliance could fall down over a piece of sticky tape left on the wall.

“And when it comes to exercising the right, the best thing is for a tenant to take a good look at their lease, check their payment history and if possible rectify anything so they are up to date before they give notice. What most tenants don’t realise is that it is their responsibility to make sure they have strictly complied with all the conditions and that they cannot assume all is well just because the landlord has said nothing.

“The outcome for Merol gives a stark warning to tenants of what happens otherwise.”

Avocet Industrial Estates LLP v Merol Ltd [2011] EWHC 3422 (Ch)

ENDS

Web site content note:

This is not legal advice; it is intended to provide information of general interest about current legal issues.