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Flood Reports and Due Diligence

27th June 2012

We believe that it is vital to raise the issue of potential flood risk with your clients in order to protect their investment and the reputation of your practice.

Flood risk has often been regarded as a problem associated with new developments. However, the July 2007 floods affected a wide range of properties in different locations across the country. The Pitt Review, which reported in December 2007, emphasised the diverse nature of flood risk and that it affects more than just properties close to rivers or the sea.

At Risk Properties

Even if a home is not near the coast or river and does not have a history of flooding, this does not mean that it is not at risk of flooding in future; surface water flooding has been far more prevalent in recent years. Environment Agency Report 2009:

 

  • River or Coastal Flooding – 1.4m properties at risk
  • Surface Water Flooding – 2.8m properties at risk i.e. twice as many as river or coastal flooding
  • Both types of flood – 1m properties at risk

Impact of the Ending of the ‘Statement of Principles’

ABI/DEFRA Agreement of June 2008 – Revised Statement of Principles

Until 30 June 2013 insurers agreed to continue to offer flood cover for certain types of domestic property and small business customers (those not at significant risk of flooding or in areas where works were planned by the Government, to reduce the risk below significant). This agreement is most unlikely to be renewed. From 30th June 2013, there will be a free market for flood insurance. Premiums (and availability of cover) will depend on the risk profile of the property. The ABI has suggested that this may result in at least 200,000 homes throughout the UK being unable to obtain affordable flood insurance. In fact, the changes to premiums and conditions may start to bite as early as 1 July 2012, for annual policies that will overrun the expiry of the Statement of Principles.

 

  • A lack of affordable flood insurance is highly likely to impact on properties’ future valuations, mortgage applications and saleability.
  • RESIDENTIAL PROPERTY – Council of Mortgage Lenders

‘It is a standard condition of all mortgages for the property to be covered by standard buildings insurance, including flood cover, for the full term of the contract, in order to protect the borrower and the lender. If insurance is not available, then it is unlikely that a property will be mortgageable.’ This point was reiterated at the March 2012 All-Party Parliamentary Group on Flood Prevention meeting.

  • COMMERCIAL LENDERS – typical Debenture provision in LMA compliant form

‘The Borrower shall maintain insurance of each Property against loss or damage by fire and other risks normally insured against by a person owning similar properties under a comprehensive buildings insurance policy whether caused by acts of terrorism or otherwise.’

Flood Reports & Due Diligence

Legal professionals should encourage their clients (whether the purchaser, tenant or the lender) to obtain a desktop flood report, for any property they are considering purchasing or taking a lease of. This will alert them to any potential problems, at a stage when it is still possible to renegotiate the price, research whether insurance cover will be available, and discuss flood resistance or resilience measures. Failure to discuss this option with clients may (if subsequently they suffer flood damage) lead to suggestions that adequate due diligence was not carried out.

Flood Reports

We recommend the following reports:

Residential
Landmark Floodsearch – £20 + VAT
Groundsure Flood – £18.50 + VAT

Commercial
Landmark Sitecheck Flood from £105 + VAT
Groundsure Floodview from £85 + VAT
Argyll FloodSolutions from £120 + VAT

If you have any queries, please contact your account manager.

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