This first article in a series on the residential sector seeks to provide some preliminary guidance and an examination of the new responsibilities and liabilities which have been created for RICS members by the new HIP legislation.

The staged introduction of HIP legislation, which began in August after delays and a judicial review, has introduced a whole new process for the sale of residential properties in England and Wales.

This new process should cause estate agency practitioners to re-examine their business systems to ensure they not only comply with the new legislation but also that they are not opening themselves up to increased liabilities.

In the past, estate agency was regarded as a relatively low risk business in terms of frequency and severity of professional indemnity claims. This could all change in the future if estate agency practitioners don’t take sufficient care in this new era.

As the new legislation was introduced in a piecemeal and, some would say, haphazard manner, there are probably many differing levels of knowledge and training within the profession.

The latest figures from the DCLG and RICS would suggest that the number of Energy Assessors who have qualified or are near to qualifying is close to the number the Government targeted to enable a stable market place to continue.

 However, the potential risks for firms are not only in coping with the logistics of demand but in managing the process. In addition, the myriad of subcontractors, who support the Pack compilers and producers could make the determination of contractual liabilities unclear.

Downward price pressures on the production of HIPs and Energy Performance Certificates (EPCs) are already beginning to appear, which suggests that the process could well become one of low margin/high volume.

This carries inherent risks for consumers and practitioners alike where thin margins might cause insufficient time or resources to be deployed to deliver an adequate level of service. Include new legal obligations and responsibilities together with a lack of clarity, to the mix and a recipe for considerable consumer and practitioner dissatisfaction could emerge.

Four bedroomed houses, which were put on the open market after 1 August 2007 should now be accompanied by a HIP and with effect from 17 September 2007 three bedroomed houses have also been included.

There are provisions in the legislation for certain types of residential property to be excluded from the requirement to provide a HIP as well as a grace period for properties which were already on the market before the legislation came into force.

This grace period however only applies until 31st December 2007. Have you diarised any properties which were and are still on the market before the legislation came into force to ensure they are picked up before 31 December 2007?

Full details of the exemptions to the requirements can be found in the legislation itself or in the guidance notes – Handling Home Information Packs [pdf] prepared jointly by the RICS, NAEA and Association of Home Information Pack Providers.

The most notable exemptions include properties which are being sold without full vacant possession, properties which are due for conversion to non residential use or are due for demolition. In these two instances planning consents are required.

Residential properties which are part of a sale of a portfolio of properties are exempt as are occupied investment properties. Exceptions also exist where planning restrictions limit the occupation of the property to agriculture, seasonal or holiday accommodation.

All RICS members who sell properties with HIPs are required to become members of an approved redress scheme. Currently there are only two approved schemes in place, one of which is the Surveyor Ombudsman Scheme and the other is the Ombudsman for Estate Agents.

In addition to redress schemes, local authority trading standard officers have been charged with policing the HIP legislation. A trading standards officer can issue warnings or a penalty charge notice for non-compliance, which can ultimately lead to fines being levied or the agent being reported to the Office of Fair Trading. Underwriters would take a dim view of any breaches leading to redress or fines.

Practitioners and their PI Insurers may already have begun to appreciate the divergence which has emerged between the legal redress traditionally available to a client through the courts and the redress that may be obtained from an ombudsman scheme.

In the financial services sector the Financial Ombudsman Service is perceived by many Insurers as having set the bar at a lower level than the courts, with the net result that awards are often made in the claimant’s favour which PI insurers would not otherwise be required to indemnify.

The type and frequency of awards made by the Ombudsman for Estate Agents has generally been of little concern either to practitioners or their insurers but a strengthened redress scheme could see more complaints being made and upheld. This in turn could lead to practitioners having to call on their PI insurance and fund any excess that applies.

In the HIP era, the residential agent and its staff should now be trained and fully conversant with the new legislation. New processes and systems together with new marketing material should have been introduced to ensure that prospective clients are made aware of the new requirements and the way in which a HIP can be provided.

As an agent, you should have decided on how you will be procuring/compiling HIP provider(s) for your clients and worked out a contractual relationship. The details and watering down of the legislative requirements have already seen some casualties among pack providers. Is there a knock on risk to your business? Look carefully at the costs and service promised by a pack compiler/provider. Do their capabilities match what is required for type of properties and clients you deal with?

If you are unsure of the contractual obligations contained in any terms and conditions provided by a prospective provider, take time to consider them and get a legal opinion if necessary. Most importantly, ensure that any contract is flexible and adaptable as this is a whole new business – you do not want to be locked into a contract that is not delivering.

If a free trial is on offer, why not take it up or ask for one. Ensure that your providers do what they promise, as their failures could reflect badly with your clients and have legal and financial implications for your business.

Other important criteria you should consider when selecting a provider are whether your intended provider has signed up to the Association of Home Information Pack Provider (AHIPP) code and, most importantly, the level of indemnity insurance cover they hold.

One apparent shortcoming of the HIP Code is that it does not currently require members to provide indemnity run-off cover, but this is a point that you should check with the provider.

As sub-contractors will frequently be providing HIPs (or component parts), it is imperative that you understand the contractual obligations and liabilities you are entering into with such suppliers. You can be sure that in due course aggrieved parties and their legal advisers will be seeking redress and compensation for errors and mistakes in HIPs.

You must ensure that you do not get caught up in this legal minefield, which could be quite challenging as you are a connected party in the HIP process. Just as the new legislation has created new property related service providers, it will create new possible avenues for action by the legal profession.

Already it has been reported that members of the Institute for Domestic Energy Assessors have hired a barrister to raise what its members consider to be allegedly unlawful terms and conditions in their contracts with HIP providers. Their concerns appear to stem from a feeling that Domestic Energy Assessors could be signing contracts which pass unlimited liability onto assessors.

Domestic Energy Assessors and their insurers have got to accept that they will be operating in a market where aggrieved parties will be seeking damages for negligence. How long will it be before a purchaser of a residential property tries to sue a Domestic Energy Assessor when they find that the property they bought is far more expensive to heat than was suggested in the EPC?

Although research may indicate that prospective purchasers pay little or no attention to the EPC rating for the property which they are interested in buying, you can be sure that same person would be more than interested when they find that their dream home costs a lot more to heat than was suggested in the EPC.

From the earliest contact with a prospective home seller, the estate agent practitioner should make it clear as to how the cost of providing the pack is to be met and who will be the legal owner of the Pack.

It is vitally important that your confirmation of instructions are redrawn to ensure that you not only get paid commission for selling your client’s property but provisions exist for the recoupment of HIP costs, more especially if a client decides to withdraw their property from the market or put it on with another agent. The question of ownership of a HIP would normally be resolved by the original procurement contract.

The question is: are you commissioning a pack for yourself or as agent for your principal? You must set out quite clearly what happens if your client decides to withdraw their property from the market or wants to change agent.

The compilation of a HIP will probably have utilised the services of a number of sub-contractors, which means that an aggrieved person when faced with mounting an action for redress would probably start with the estate agent as the pursuit of individual contractors and sub contractors might prove too expensive or problematic.

In the past an estate agent’s primary duty was to the vendor client. Now the duty could be extended to both vendor and purchasers, whether prospective or actual, more especially when the DCLG’s guidance notes for consumers contain the following advice –“If something comes to light after you have bought a property you may be able to seek redress from your estate agent or HIP provider depending on who is at fault.”

Having won the instruction to sell a property and commissioned the procurement of a HIP, where do the agent’s legal obligations stop and start? As with any new legislation, there are still considerable grey areas.

In the meantime, the overriding message for estate agency practitioners has to be that they should not provide comment or advise on the contents of the pack. The information contained in a Pack is for the benefit of prospective purchasers, it is for them and their advisers to advise and interpret it.

The moment an estate agent comments on the contents of the HIP they may be deemed to have assumed some responsibility for the accuracy of its documents.

We will return to this topic again to review developments as they unfold. In the meantime if you are a practising residential estate agent, you should have :

• Undertaken training for you and your staff to ensure you know the legal requirements of the HIP legislation.
• Introduced new systems to cope with the HIP requirements
• Decided on how you are going to procure HIPs on behalf of clients
• Satisfied yourself that your chosen HIP providers and their supplier sub contractors have adequate insurance in place
• Revised your marketing strategy, confirmation of instruction documents and fee/commission structure
• Issued instructions to all staff that specific advice on the contents of Home Information Packs should not be given, even if a prospective sale rests on a purchaser pressing you for a response or advice.

Michael Mortimer
Senior Risk Management Consultant
Travelers