Great Scott! Is a familiar safeguard back like it never left?
In a significant U-turn, the NHBC has reinstated deposit protection under its Buildmark Choice policy for deposits held as agent by a developer (the entity building out the project).
The Buildmark Choice policy is NHBC’s specialist product for newly-built or newly-converted homes intended for social/affordable rent, private rent and/or shared ownership. This is not to be confused with the Buildmark policy. The Buildmark policy is NHBC’s product for newly-built or newly-converted homes intended for private sale.
Buildmark Choice has been tailored with Registered Providers (RPs) in mind, to help them manage development risk. The key feature of this protection is insolvency cover.
Before 1 April 2022
While it is generally less risky for deposits to be held by the developer as stakeholder until completion, it has nonetheless been a relatively common practice for deposits to be held by the developer as agent. This means that the developer can release the funds upon exchange of contracts rather than at completion.
Typically, an RP and a developer will arrange this to ease the burden on the developer’s cashflow. An RP should only accept this arrangement if the deposit is protected in some way.
Prior to 1 April 2022, the Buildmark Choice policy offered that protection to RPs; an RP could recover deposit monies already paid to the developer under the contract if the developer went bust before practical completion or golden brick (either of these events could be the trigger for the sale of the land to the RP depending on the terms of the sales agreement).
With this safety net, RPs could permit deposits to be held by the developer as agent without worrying about losing the deposit if the developer becomes insolvent prior to the sale of the developed land to the RP.
After 1 April 2022
This protection was withdrawn on 1 April 2022. Instead, the NHBC indemnified RPs “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.”
The translation is that the NHBC would only step in if an RP had to shell out more than the original contract price for a project to be completed, but only if the extra cost was reasonable and within the policy cap. So, what did this mean in practice?
Firstly, it meant that the RP had to see the scheme through to completion to benefit from the cover. No build, no payout.
Second, no cover for lost deposits. That safety net for RPs was gone.
The industry adopted a way to circumvent the 2022 wording and get the safety net back… endorsement letters.
An endorsement letter from the NHBC, obtained by the developer, would confirm that the pre-2022 policy wording applies, thereby securing the deposit. But it was not that simple. Ultimately, the change left RPs scrambling for endorsement letters to safeguard upfront payments to developers that were made before land transfers. This caused delays, additional administrative and legal costs, and put further strain on the economic viability of projects.
If an RP could not secure an endorsement letter, and the developer did not have the liquidity to continue, then that deposit is no longer secured. The RP would have to wait in the insolvency queue behind all the secured creditors to see if they can get anything back.
In short, an RP was left with two options if their developer was in the red: walk away or double down. Walking away would be terminating the contract and foregoing the deposit, and doubling down would be to throw even more cash at the project and hope to claw back as much as possible under the policy.
Neither option was appetising, especially not in the context of 2022 (global recession, high rates of inflation, and supply chain crises).
After 1 April 2025: Endorsement letters? Where we’re going, we don’t need endorsement letters
From 1 April 2025, section 1 of the policy once again covers deposits and other sums paid under contract if the developer becomes insolvent before the trigger point for a sale. A scheme properly registered with the NHBC Buildmark Choice after 1 April 2025 will benefit from this cover.
The revised policy wording now confirms that in the situation where the RP does not yet own the land or homes, the NHBC will cover the loss of a properly paid deposit that cannot be recovered from the developer or its insolvency practitioner. This means that RPs can once again release deposits to be held as agent with greater confidence, provided the scheme is registered post-April 2025 and the optional insolvency cover is selected.
However, this is not a full return to the pre-2022 position. The cover is capped at 10% of the contract price as recorded in the NHBC’s registration documents. 10% is the most that the NHBC will pay. The NHBC also retains discretion over which type of cover applies in each case.
What Should RPs Do Now?
In a nutshell, RPs can once again release deposits as agent with confidence.
However, the developer must provide proof that the scheme is registered with NHBC Buildmark Choice and the date of registration. The RP must ensure that the insolvency option is ticked and confirm that the 10% cap is sufficient to protect the deposit.
If you have questions about these changes, or you’re dealing with a developer teetering on the brink (or already over it), then please get in touch with us.