New home warranties and professional consultant certificates are essential for developers as they give financial institutions confidence that the building is in good condition and enables the end purchaser to secure the relevant mortgage.
Section 6.7 of the UK Finance (UKF) handbook defines the steps when dealing with Building Standards Indemnity Schemes for new properties. In particular, it states that if a new home warranty is not available, a professional consultant certificate (PCC) may be acceptable to lenders as an alternative.
However, as a property developer, reality can sometimes mean that you are considering the alternative because of unforeseen circumstances that have resulted in a constriction of cash flow. But which should developers go for?
The case for professional consultant certificates
There are rare occasions where a structural warranty is not in place, either because of an invalid policy, for instance, if an insurer has exited the market. Or perhaps because of a change of exit strategy – built to rent changing to build to sell – or simply an oversight. Developers often consider professional consultant certificates or architects’ certificates in such situations.
On smaller developments – under ten units – it is still possible to satisfy the criteria set by some mortgage lenders with a Professional Consultants Certificate (PCC).
Similar to unrated structural warranty insurers, the primary point that piques interest for potential purchasers is the price – PCC’s can be up to 40% cheaper when compared to the price of a warranty.
The certificate can often be issued quickly with a minimal amount of administration work in comparison.
Drawbacks of a PCC
With the immediate attraction being the price, it’s vital to consider the length of ‘cover’ on offer, which in most instances is only six years. This said, some PCC providers can extend the term to ten years, at an additional cost.
In the above paragraph, ‘cover’ is highlighted to distinguish the difference in the use of the term between what you receive from a warranty, which is first-party insurance, and what ‘cover’ means when opting for a certificate. Since a PCC is not a warranty-specific insurance product, any claim will require proof of negligence and reliance that the professional offering the certificate has a sufficient level of Professional Indemnity Insurance should your legal team be able to prove negligence.
It’s also helpful to note that the apparent 40% savings also coincides with a 40% reduction in the term the certificate runs for compared to new home warranties.
Most mortgage lenders will not accept a PCC if a site has in excess of ten residential units and the market gets considerably smaller still if the project is part-complete or complete.
With Homes England announcing a £250m fund to provide loans to small and medium-sized builders, any project funded under the scheme will not accept Professional Consultant Certificates under any circumstances.
While PCCs can be a viable option in certain circumstances, it is vital that developers note how the lending market has matured with regard to these certificates. The best advice would always be to seek a warranty that is backed by A-rated capacity.
Failing that, explore the unrated warranty market and as an absolute last resort, consider a professional consultant certificate, with the caveat that you gain agreement from the lender and, where possible, the mortgage provider from your would-be purchasers too.
