Developers and Registered Providers (RPs), when working together, such as on the disposal of section 106 properties, have an agreed practice in place for the payment and release of deposit monies paid by the RP in order to help facilitate cash flow through the development projects. A policy change from the National House Building Council (NHBC) is set to disrupt this.
Developers often request that deposit monies paid by the RPs, which may initially be held as stakeholder, are then released on the supply by the developer of evidence of NHBC registration, prior to completion of the transfer of the properties.
This market norm has been on the basis that RPs have protection from the NHBC Buildmark Choice Policy (on the assumption that the optional insolvency cover has been procured). The policy used to set out:
“if due to their insolvency or fraud, the Contractor does not complete the work defined in the Building Contract we [NHBC] will, at our option, pay either:
- the amount above the Contract Price, including professional fees, needed to substantially complete the work defined in the Building Contract (including any additional insurances or inspections charges payable to NHBC) or
- any amount paid to the Contractor in accordance with the Building Contract which cannot be recovered from them”
Although the policy wording, with its reference to building contracts, did not sit entirely squarely with a typical section 106 sale and development agreement arrangement, it was generally accepted that the second limb would enable the recovery of deposits if the developer became insolvent. Therefore, the release of deposit monies on NHBC registration has been regularly agreed and is common practice.
However, on 1 April 2022, the NHBC’s Buildmark Choice policy (which relates to affordable housing) was updated so that it no longer covers amounts paid to the Contractor in accordance with the Building Contract. The new wording is as follows:
“Provided that the builder becomes insolvent during the period of insolvency cover shown on the Confirmation of Acceptance and Registration of Project document, we will indemnify you 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. This is limited to the specifications in the original contract with the builder and to ensure compliance with NHBC requirements.”
It would be prudent for both Developers and RPs to consider the implications of this moving forward and how both parties may now see a shift from what was considered the market norm. RPs may now be more resistant to the release of their deposit monies prior to completion due to the risk they face with the lack of insolvency cover. Although the newly worded policy does still provide protection for RPs during construction once completion of the land transfer has taken place (at, for example, “golden brick” stage), prior to completion RPs are unlikely to be in a position to procure the completion of the works and therefore benefit from payment of funds needed to complete the construction.
The circulation of the early deposit releases can be vital to these development projects to help keep the work progressing. Therefore parties will need to think more creatively and collaboratively about potentially agreeing other forms of security/mechanisms to protect the RPs’ position so they remain comfortable with the release of these funds prior to the completion of the land transfer.