Summary and implications

This article considers the potential liabilities facing developers under the National House-Building Council (NHBC) Buildmark insurance scheme in respect of defects found in their buildings in the wake of the recent decision in Harrison and others v Shepherd Homes Ltd and others in the Technology and Construction Court. Despite clear wording in the scheme requiring written notification of defects to be given to developers, it was held in this case that such notification could be given orally and that there could be constructive notification of defects.

The judgment given by Ramsey J in this case stated that written notice is important because it helps to create certainty and avoid disputes, but that it is not essential in every case.

Developers should note:

  • in certain circumstances, oral and constructive notice given by a homeowner will be sufficient for the requirements of the Buildmark scheme;
  • where written notice has been received for other units within a development including a generic problem, oral notice for units may be sufficient;
  • developers (and their legal advisers) need to be wary of any correspondence written which could be seen to waive the requirements for written notice of defects and should, where necessary, make clear that such correspondence does not constitute an election to waive these requirements.

The NHBC Buildmark Scheme

The “Buildmark” insurance scheme operated by the NHBC is a 10 year insurance scheme which applies for the benefit of every owner of a home constructed by a developer registered under the scheme. With over 18,000 developers registered with the scheme it applies to around 85 per cent of all new homes built each year in the UK.

Under the scheme a developer assumes obligations to the homeowner to rectify defects in the homeowner’s property notified within the first two years following completion. These obligations are in addition to those contained within the contract of sale. The NHBC also assumes an obligation to indemnify the homeowner against any losses caused by a developer’s failure to honour its obligations to the homeowner.

The usual remedy under the scheme in this two year period is for the developer to rectify any defect itself. However, if this does not occur, the scheme provides for compensation to the homeowner for the defect of a maximum amount of the original purchase price (as shown on the insurance certificate and increasing by 12 per cent compound annually), or £500,0001 (whichever is lower).

The decision in Harrison v Shepherd Homes

The recent decision of Ramsey J in Harrison v Shepherd Homes Ltd in the Technology and Construction Court dealt with various issues relating to the liabilities facing the developer, Shepherd, in respect of claims brought by homeowners for defects found within foundation structures across an entire residential development of 94 houses. All of the affected houses benefitted from NHBC Buildmark cover.

10 lead claimants were chosen from the homeowners to proceed to trial. The court’s decision is an interesting one as it deals with a wide number of legal issues such as a developer’s liability under sales contracts and the Defective Premises Act 1972, developer’s express and implied obligations and the appropriate measure of damages for building defects, for which the court set out 11 key principles.

All 10 lead claimants made claims against the developer under section 2 of the Buildmark scheme.  

Section 2 refers to the developer’s obligations following receipt of written notification of a defect or change from a homeowner. Section 2 states that the “Builder” must:

“within a reasonable time and at his own expense, to put right any Defect or Damage to your Home or its Common Parts which is notified to him in writing within the period of the cover (emphasis added).

One of the key issues to be decided in this case was whether the homeowners had complied with this requirement to notify the developer in writing of the defects within this period.

It was accepted that four of the claimants had not given the developer any written notification of defects whatsoever within the required two year period.

These claimants argued that the developer had constructive notice and/or that the notice requirements had been waived due to the fact that the developer had been notified in writing of the defects in question by at least two other residents during this period and by Shepherd’s actions in related legal proceedings that showed it had knowledge during the relevant period about the general problem of cracking to the foundations of the properties at the development. It was also argued by one claimant that oral notice had been given via telephone calls to the developer.

Ramsey J held that the oral notice given by that claimant was sufficient for the purposes of the Buildmark scheme. Given that for a large number of plots at the development, Shepherd did receive written notices of the foundation defects which were subsequently shown to be a generic problem, it was also determined that it had sufficient notice of these defects at the time for notice to have been given constructively.

Furthermore it was held that, on the basis of correspondence written by the developer and its solicitors, that there had been an election to waive the notice requirements.

Accordingly Shepherd could not escape liability under the scheme to rectify these defects by relying on the strict wording of section 2 of the scheme that written notification of defects must be given.

Oral notice sufficient as:

  • written notices elsewhere on estate indicated generic problem;
  • correspondence indicated intention to waive written notice requirement.

Conclusion

It awaits to be seen how widely this decision is followed. It may be the case that the court’s decision in respect of constructive notice is limited to circumstances in which a developer is aware of defects which could affect the whole (or at least a substantial part) of a development and where express waives of notice requirements have been referred to in correspondence. In the meantime developers should be aware that they may not be able to rely upon the strict requirements for written notice as a means to escape liability to repair defects under the Buildmark scheme.