The key to understanding the difference between an NHBC warranty (Buildmark) and collateral warranties or TPRs is to look at the purpose for which each is provided.
Collateral warranties and TPRs
These are standard in the industry and everyone familiar with them understands the purpose behind them. Under a collateral warranty a professional consultant, building contractor or sub-contractor warrants to a third party that it has complied with its appointment, building contract or sub-contract, as the case may be. The third party beneficiary will have an interest in the property in question, for example they may be tenant, a purchaser or a lender. The collateral warranty provides the beneficiary with a contractual remedy against the warrantor, if it suffers a loss as a result of the warrantor breaching the terms of the primary contract. It avoids the problems that a third party would otherwise have in seeking to recover its loss (usually pure economic loss) in tort.
Third party beneficiaries may, of course, now obtain similar rights under the Contracts (Rights of Third Parties) Act 1999.
NHBC: what is its purpose?
The primary purpose of NHBC Buildmark is to raise standards in the new home building industry and provide consumer cover for new home buyers. In reality it provides a combination of consumer protection and protection for mortgagees. Many mortgage lenders will not provide a mortgage for a new home in the absence of an NHBC (or similar) warranty because they want some assurance that the home has been built to specified standards of construction. NHBC Buildmark is therefore addressing different issues and concerns from collateral warranties or TPRs.
NHBC has four major warranty products:
- Buildmark, for private homes.
- Buildmark Choice, for affordable housing.
- Buildmark Connect, for mixed use development.
- Solo, for self-build projects.
The cover differs slightly depending on the type of policy.
Buildmark Connect is the warranty that our clients come across most often. It is provided for commercial premises on mixed use development projects. This is a slightly strange situation in itself, as it is the residential part of the development that “demands” an NHBC warranty. Without the imperative of a mortagee’s requirements, it is unlikely that this type of warranty would be offered solely in relation to commercial premises.
Buildmark Connect: what does it provide?
Buildmark Connect is an insurance-backed ten-year warranty. Given the purpose of NHBC Buildmark, it won’t come as any surprise that it is not a guarantee for everything that can go wrong on a new property over ten years. Broadly speaking, an NHBC policy provides the beneficiary of the policy (and the mortgagee) with some protection regarding the construction of the “Premises” (as defined in the policy). The policy covers “Defects” (that is, breaches of NHBC’s mandatory requirements for construction) and “Damage” (that is, physical damage to the Premises caused by a Defect).
In the first two years, responsibility for remedying any Defect in or Damage to the Premises rests with the builder. If the builder fails to do so, under Buildmark Connect the insurer will pay the amount of an arbitral award or court judgment against the builder or, at the insurer’s discretion, arrange for the necessary work to be carried out at its expense.
In years three to ten, the cover is more limited: Buildmark Connect offers a warranty on the structural elements only of the Premises.
Clearly, the cover is more limited in extent than that provided by collateral warranties or TPRs. It covers only Defects (as defined in the policy) and is more limited still in years three to ten. In addition, NHBC’s mandatory requirements may be lower than the design and construction standards that are typically warranted under a collateral warranty.
Also, as may be expected from a warranty backed by insurance, the insurer’s total aggregate liability for all claims under the particular NHBC policy is capped and an Excess applies to each and every incident of Damage. You will need to check what the Excess is when the claim is first notified, as it is indexed on an annual basis.
Buildmark Connect: what does it not provide?
Again, given the nature and purpose of the NHBC warranty, it is not surprising that this policy does not cover several types of loss arising out of Defects or Damage that may be recoverable under a collateral warranty or by way of TPRs. Important exclusions are:
- Any cost, loss or liability for which compensation is provided by legislation or that is covered by any other insurance policy.
- Any reduction in value of the Premises or the business carried on within them.
- Loss of profit or reduction in turnover, loss of business opportunity or income, the payment of rent, service charges, taxes, rates and other costs payable regardless of interruption in or loss of use of the Premises or any other consequential loss.
- Costs associated with the fit-out of the Premises.
- Replacement of an undamaged item solely because another item of the same nature, design or colour has to be replaced and the original items cannot be matched.
Assessing the risk
In Robinson v Jones, Lord Justice Jackson commented that, although the protection provided by an NHBC warranty is substantial in terms of the risk of a builder being unable (for example, through insolvency) or unwilling to put right defects appearing in the first two years after completion of a building, it is not total.
This is the key. An NHBC warranty offers substantial protection, but be clear about what it doesn’t offer. So, if commercial premises in a mixed use development completed three years ago are being offered for sale with the benefit of NHBC Buildmark Connect, but not collateral warranties or TPRs, you can make an informed decision as to the risks involved.