We previously provided our initial observations on the New Home Quality Code (NHQC), released in December 2021, and what this will mean for housebuilders. During the course of 2022 housebuilders will need to register with the New Home Quality Board (NHQB) to comply with the Code, meaning many are now gearing up to fulfil these new regulations.

To help gain a further understanding of these new rules, our housebuilder litigation specialists hosted an event to discuss the upcoming changes that the Code will bring. We were joined by Douglas Cochrane, Vice-Chair of the NHQB who gave a talk that outlined several of the key changes, including an indication that the maximum compensation that the New Homes Ombudsman can now award would be £75,000 (albeit this is subject to change) - not the £50,000 as previously thought.

After the talk we hosted a roundtable discussion with key stakeholders from the country's leading housebuilders, who discussed the Code and what it will mean for them. In this article we will cover the some of the issues covered by Douglas in his talk and some of the key themes of the roundtable discussion which followed

Sales process

The NHQC has the customer at its heart. The NHQC (and its guidance) places a particular emphasis on protecting vulnerable customers and the general principle of "TCF" - treating customers fairly. Whereas under the Consumer Code for Homebuilders it was permissible for developers to provide information to customers during the legal process, Douglas was keen to stress that the emphasis under the NHQC would shift to providing this information earlier - during the reservation process.

There has always been a requirement for developers to consider the needs if vulnerable customers, but the NHQC places the onus on developers to identify vulnerable customers, even if they do not declare a vulnerability. During the roundtable discussion it became clear that this is likely to prove difficult in practice, particularly so for sales teams who have the majority of customer-facing contact before exchange of contracts. It may be that one way to circumvent the issues would be to include a standard question about vulnerability in reservation checklists, albeit this also has its drawbacks.

While the Code appears to deliberately avoid providing a clear definition for what constitutes a vulnerable customer, the aims of the Code seem to mirror the regulation of financial institutions. This means that:

  • sales teams must avoid assuming that vulnerabilities are limited to physical or mental limitations on their ability to understand or progress the transaction;
  • with this in mind, sales teams may need to be more vigilant in recording what customers disclose to them. For example, an off-hand remark about a recent but significant change in financial, marital or familial status may be sufficient to indicate that the customer is vulnerable;
  • a statement from a customer that they do not consider themselves to be vulnerable may not be sufficient if the housebuilder has knowledge of the customer's circumstances which clearly indicate otherwise;
  • where a housebuilder suspects (but cannot be sure) a customer is vulnerable, the housebuilder is obliged to enquire about this in a sensitive manner;
  • once a housebuilder does identify or is informed about a vulnerability, there will be an expectation that adjustments are made to account for it during the sales process. Examples may include giving customers longer than normal to consider the transaction or providing more accessible sales material.

The guidance gives further details of other organisations that can help with identifying vulnerable customers, which should hopefully clarify the scope of what is expected by sales teams when speaking to a customer.

Other important changes in the sales process include the mandatory introduction of a 14-day cooling off period following a customer entering into a reservation agreement (with the results that the minimum time between reservation and exchange of contracts is now 6 weeks), as well as housebuilders being obliged to provide information of the potential future management and service costs that could be incurred within 10 years of purchasing a new home. The overarching message is clear: customers need as much information as possible to allow them to make an informed decision about their purchase.

What is less certain (at this stage) is how the New Homes Ombudsman will deal with developers who breach these requirements. This should become clearer in due course once further information about the Ombudsman is released.

Opportunity for pre-completion inspection

At the beginning of his talk, Douglas discussed the many reasons the NHQC was being put in place now - one of the main reasons is the large number of complaints from customers who have purchased new homes.

To combat this, the NHQC provides that the housebuilder must provide the customer with an opportunity to visit their new home and allow the customer to arrange for a "suitably qualified" inspector to carry out a pre-completion inspection from five calendar days after the notice to complete has been served. If the customer decides to appoint their own inspector this will come at their own cost.

The NHQC provides that a "suitably qualified" inspector must:

  • be a member of a professional association undertaking surveying services in the residential sector (RICS, RPSA etc.);
  • hold relevant Professional Indemnity Insurance;
  • only work within their competency, and;
  • use the Standard Template Pre-Completion Inspection Checklist.

These conditions seek to create a pre-completion inspection regime that is consistent across the industry. The Pre-Completion Inspection Checklist will be published by the NHQB in due course. We expect that this checklist will be in a standard form that can be used by inspectors across all new build homes to review the finish of the property and identify any snags before legal completion. It is anticipated that the checklist could be completed either in paper or electronic form.

Douglas made it clear that there is nothing to prevent housebuilders from suggesting a number of "suitably qualified" inspectors for their customers - albeit it should be entirely the customer's choice and no incentive should be offered for using someone off the housebuilder's panel.

The clarification around the standard checklist (which wasn't part of the version of the NHQC which was the subject of the consultation last summer) was well received by those in the roundtable session, who felt a standard checklist will ensure consistency throughout the industry. However, without having sight of the checklist yet, it is difficult for developers to put processes in place for this at this stage.

Aftersales Management

Housebuilders will be required to provide an After-Sales Service for at least two years following the sale of a new home. That is nothing new. What is new is the more stringent requirements on timescales which are set out in Part 3 of the NHQC. Douglas described this change as being very black and white - meaning these isn't much room for housebuilders and developers to change or interpret these rules in a different way. He also described this as a game-changer for the industry, where one of its biggest complaints is the lack of communication from housebuilder to customer.

This service will deal with snags (i.e. a minor imperfection or malfunction that does not meet the expected standard), emergency issues (i.e. an immediate threat to safety, security or wellbeing), as well as any complaints raised by the customer during that period. As with the Consumer Code, housebuilders must make their customers aware of this service, e.g. by providing relevant literature from the outset with a further copy on legal completion. This literature should also confirm that the customer has a right to refer a complaint to the New Homes Ombudsman.

Complaints are to be dealt with differently to snags under the new Code. There is an expectation that most snags will be resolved within 30 calendar days after being raised, and if the snag cannot be resolved within 30 calendar days, the housebuilder should update their customer before the period expires.

For complaints, there is a process which requires the housebuilder to send no fewer than five letters or emails to the customer during the period following the complaint. The key deadlines are:

  • by day 30 the housebuilder must have assessed and substantively responded to the customer's complaint and;
  • by day 56 the housebuilder must issue a "State of Play" letter providing (amongst other things) a summary of what action has been taken to date, details of what is still outstanding and an indicative timescale for resolution.

Participants of the roundtable raised concerns about the amount of paperwork this would create for Customer Care teams.. To help assist the process of managing the amount of literature that will be shared with the customer, we have suggested drafting template letters to help keep communication on track through the milestones outlined.

New Homes Ombudsman Service

Douglas also confirmed that the maximum compensation the Ombudsman can award customers is £75,000 - a £60,000 increase from the existing amount under the Consumer Code. Previously a figure of £50,000 had been mentioned, and many of the participants at the roundtable were concerned about this large increase (albeit grateful that it was not an unlimited amount, as the government had been seeking).

The NHQC envisages that complaints not addressed to a customer's satisfaction can be referred to the New Homes Ombudsman Service after 56 days. This service will initially be funded by annual membership fees to be paid by housebuilders on the basis of revenue, with larger housebuilders shouldering a greater proportion of the costs (regardless of how often the service is utilised by their customers). In future a "polluter pays" approach is anticipated for funding the Ombudsman.

Whilst we are awaiting further detail about the Ombudsman's role and powers, our key observations are:

  • the Ombudsman will not accept every referral that is made more than 56 days after a complaint; if it is clear that the housebuilder is engaging with a customer's complaint it is likely that the Ombudsman will put on hold any referral  pending the outcome of the developer/warranty provider process;
  • the maximum award the Ombudsman can make is £75,000 (compared to the existing £15,000 under the Consumer Code) - this figure will be calculated by reference to the cost of rectification, compensation for any losses evidenced and/or an inconvenience (or goodwill) payment However, it is not clear whether the assessment of compensation for breaches under the Code will be similar to the existing consumer code, or if the Ombudsman will be given wider powers (for example in relation to resolution of snagging issues);
  • most concerning, it is not clear how the warranty provider's resolution schemes (and agreed tolerances) will be viewed by the Ombudsman - with a suggestion from Douglas that something which is viewed as "within tolerance" by the warranty provider might still be a breach in the eyes of the Ombudsman (although only where something "within tolerance" is not considered by the Ombudsman to be treating the customer fairly);
  • similarly, there is no indication whether decisions issued by the Ombudsman will be binding or persuasive on future decisions - we believe that this is important to ensure consistency of approach; and
  • it is reasonable to conclude that the Ombudsman will be an attractive avenue for customers to seek a remedy, especially where the legal basis of any complaints are more likely to favour the housebuilder. Even where a customer has a good legal case, a referral to the Ombudsman will now represent a cheaper and less time-intensive way of potentially achieving significant compensation.

In light of the above, housebuilders will need to seriously consider the level of financial provision (and/or insurance) required to protect themselves against adverse decisions. In particular, housebuilders that utilise development-specific or regional subsidiaries will need to assess the cost of providing adequate cover in the event multiple customers refer complaints to the Ombudsman.

Here to help

Throughout the talk and the following discussion it was clear to see there is still a lot more information and clarity needed to aid this transition. To help this we are planning a series of training sessions for legal, sales and customer care teams throughout the year, as well as offering bespoke advice to housebuilders to help them prepare for the NHQC (including undertaking document checks to ensure compliance with the new rules). If you have any queries about the new Code or how it will apply to your business, please contact Rob Bridgman.

To get further detailed analysis on the New Homes Quality Code, as well as information on training sessions and other events, subscribe to our Real Estate mailing list.