Real Estate Blog: Insolvency Cover – An Important Reminder for Registered Providers

Last year, the National House Building Council (NHBC) made a significant change to the insolvency cover available under Section 1 of its Buildmark Choice policy.

Buildmark Choice is a new build warranty and insurance product, specifically designed to help Registered Providers manage development risk. Insolvency cover is a key aspect of this protection.

This article sets out the position for schemes registered with Buildmark Choice before and after the change. It also offers some top tips to ensure Registered Providers are not adversely impacted.

Before 1 April 2022

Before the change came into effect, if a developer became insolvent prior to completion, a Registered Provider could recover deposit monies already paid out under contract.

With this protection as back up, permitting a deposit to be held as agent (i.e., to be released immediately on exchange) was relatively low risk and, of course, preferred by developers managing their cash flow. Ultimately, if a developer went bust, a Registered Provider could still terminate the contract and claim back their deposit

.After 1 April 2022

However, the position has changed for schemes registered with Buildmark Choice from 1 April 2022. Now, NHBC will only indemnify a Registered Provider “up to the limit shown, for the reasonable amount, over that stipulated in the original contract, you have to pay to complete the building of the home(s) because the builder is insolvent”. In other words, if a Registered Provider has to pay any more for the home(s) to be completed over and above the contract price, NHBC will indemnify the Registered Provider, provided it is a reasonable amount and up to the indemnity limit.

So, what does this mean? Firstly, a Registered Provider is not covered for loss of deposit. In addition, to benefit from the indemnity that is still offered, a Registered Provider must complete the scheme. In short, a Registered Provider has two options, either:

1. terminate the contract and forfeit its deposit; or
2. continue paying out money until the homes are constructed, with the intention of then claiming back as much as possible under the terms of the policy.

Option To Extend Cover

One available solution is to apply directly to NHBC to extend the level of cover provided by the current Buildmark Choice policy, so that it (once again) includes loss of deposit. This application must be made by either the Registered Provider or the developer. However, such applications are decided on a case-by-case basis and NHBC has discretion over whether to apply the enhanced cover to the scheme(s) in question.

Insolvency Cover Top Tips

1. Ideally, deposits should be held as stakeholder until completion.
2. Asking for a deposit to be held as stakeholder until registration with NHBC Buildmark Choice no longer gives sufficient protection (unless evidence is provided that NHBC has granted the enhanced cover described above in connection with that particular scheme).
3. Registered Providers should only agree to a deposit being held as agent if a developer has provided both:
   1. evidence of registration of the scheme with NHBC Buildmark Choice; and
   2. a copy of the endorsement letter from NHBC confirming that the scheme has the benefit of the enhanced cover.

If you wish to discuss the implications of this policy change further, then please contact Lorna Trimble or another member of our Social Housing Team.