Flood risk What is a solicitor’s role?

Flood risk investigations are now an intrinsic part of the conveyancing process, but to what extent do solicitors need to advise their clients and what are the implications of forthcoming changes to flood insurance? Hannah Kramer reports

he winter of 2013/14 has impact upon its value and insurability. proved to be one of the wettest Some clients may well turn to their T on record for England and Wales, solicitors for guidance. However, and the extensive flooding across what should our role be? Is it to much of the country has dominated identify possible risk, or advise the news headlines. At the time of on the practical steps to be taken? writing, the Association of British Many solicitors already carry Insurers have said that the cost of out site-specific flood searches this extreme winter weather to through commercial search insurers will be more than £800m, agents as part of their standard and the Environment Agency are conveyancing procedure. To what still issuing flood alerts for the extent should we be reporting and Hannah Kramer is a South East and South West of advising on the results? Flood risk solicitor at Forsters LLP England, highlighting on their analysis clearly goes beyond our website that this was the wettest expertise as legal practitioners, January in 250 years. Unfortunately, so should we be eschewing any the latest flooding continues the responsibility at all and directing trend toward an increased incidence clients toward flood risk surveyors of flooding in the UK in recent instead? There is a need for clear years. Many parts of the country guidance on a solicitor’s role in experienced flash flooding in 2000, advising clients on flood risk. with further flooding affecting The increased focus on flood 55,000 properties in the summer risk has also been precipitated by of 2007 (the same year Rihanna’s the current status of the agreement aptly named hit song Umbrella between the government and the dominated the charts for ten Association of British Insurers consecutive weeks), and the (ABI), the Statement of Principles, Environment Agency estimates which formally expired in July 2013 that the cost for all properties and is set to be replaced by the affected by the severe flooding Memorandum of Understanding (see in 2012 reached £277m. The forecast further below). This is particularly ‘Flood risk analysis clearly for the rest of 2014 looks set to likely to affect the levels of insurance goes beyond our expertise remain wet in some parts of the premium paid by small businesses country, even if the rain holds and homes in council tax band H as legal practitioners, so off, given current groundwater where properties are at a high risk should we be eschewing levels in some areas. of flooding. Engaging in increased any responsibility at all In light of this, concerns about flood risk due diligence, and advising and directing clients flood risk will, understandably, clients to fully investigate the cost toward flood risk surveyors be on many clients’ minds when and availability of flood insurance, instead?’ proceeding with property transactions. will therefore need to play a greater Flooding may not only affect their role in the pre-contract due diligence future use of a property, but also and reporting processes.

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depending on the replies initially Law Society guidance provided, further specific enquiries should also be raised and the • Do not rely on screening searches, such as those covered by the Environment responses flagged to the client at Agency’s website, which are not property specific, do not cover flood depth, an early stage in the transaction. speed or volume, and do not cover flooding from sources such as groundwater or overflowing sewers. Supplement with enquiries and, where appropriate, site-specific Screening searches via commercial search agents. Flood risk screening reports provide an initial, high-level, non-property • Consider the terms of any commercial flood risk search agent used, and the data specific flood risk assessment and set the result is based on. are often produced quickly at low • When reporting to clients clarify that you do not have the expertise to advise on cost. The results are based on data technical details covered in the report. available from local authorities, the Environment Agency flood map • Before entering into a binding contract, advise your client to establish the available and other publicly available sources. terms of any buildings insurance for covering flood damage for the relevant However, these reports will not property, and to discuss the level of flood risk to which the property is exposed necessarily provide information with a building surveyor or flood risk assessment consultant. which is as accurate or comprehensive as may be required. Although the • Advise clients of lenders’ insurance requirements. Environment Agency’s flood map now covers areas at risk of surface water flooding, screening reports Is there responsibility for The latter can either be carried do not always show potential investigating risk of flooding? out directly, or via a separate flooding from groundwater or The Law Society guidance, published environmental search which potential depth of flooding, or on 23 May 2013, states that: carried out flood screening account for the presence and impact assessments. of flood defences, and are based on ... in all conveyancing transactions, postcode rather than the specific when acting for a prospective Enquiries property. Information obtained from buyer, tenant or lender in Pre-contract enquiries usually take the National Flood Risk Assessment, residential and commercial the form of Commercial Property covered by the Environment Agency’s transactions, you should mention Standard Enquiries (CPSEs) for flood map, accounts for all properties the issue of flood risk to your transactions involving commercial in a large-scale grid (50m2 for 2010). client and, if appropriate, make property, and the Law Society However, not every property in the further investigations. Property Information Forms (TA6) same square grid will be subject to in respect of residential property. the same risk level. Responsibility for carrying However, these enquiries only ask The Law Society guidance out an initial investigation on for details of flooding affecting the therefore recommends that such flood risk therefore clearly lies relevant property; solicitors may reports are not relied upon as the with solicitors. therefore choose to supplement sole means of assessing the risk of Traditionally, flood risk due these with further enquiries asking flooding for a property. The Land diligence has been limited to if flooding has affected any nearby Registry ‘Flood Risk Indicators’, pre-contract enquiries of the seller properties and, if so, the source available to both conveyancers and or landlord, and searches of the of flooding in order to gauge the the public at a cost of £9 per title, are Environment Agency website. level of risk. Where necessary and based on the Environment Agency’s

What flood risk due diligence can be carried out?

• Flood risk screening search.

• Desktop environmental search including detail on flood risk (see box on p15).

• Enquiries of seller/landlord.

• Review of the Environment Agency’s flood map available on their website. However, note there are limitations to relying solely on such information.

• Land Registry ‘Flood Risk Indicator’. This is based on the Environment Agency’s flood map and is therefore subject to the same limitations.

• Physical inspection and valuation.

14 Property Law Journal April 2014 Flood risk data and, therefore, should not solely Some searches are more detailed and is to be allocated appropriately be relied on when assessing flood therefore more suited to commercial between the solicitor and surveyor risk either. sites, while others are more appropriate based on their respective expertise. for residential property transactions. Determining the level of flood risk, Commercial searches The accessibility of search results also and what mitigation or defence and flood risk assessments varies. For example, some providers steps (if any) can be taken, are the The Environment Agency’s 2009 will include brief summaries giving surveyor’s responsibility. report, ‘Flooding in England’, estimated that one in six properties in England are at risk from flooding. This estimate almost doubled those Where proceeding with a specific flood search, it is of previous years as it accounted important to ensure that you have investigated the for, among other things, the risk of flooding from surface water flooding. search agents used, the data sets covered by the It is becoming increasingly apparent search and their accuracy, and the search agents’ that a risk of flooding is not always based on the proximity of terms of business and any exclusions from liability. a property to coastlines or rivers alone. Understanding the sources of flooding is therefore important when determining the relevance of existing a ‘passed’ or ‘further action’ overall However, as the Law Society or planned flood defence schemes risk assessment. Though useful, clients guidance does not specify what and the likely cost of insurance. should also be referred to the flood information should be covered in This information will be particularly source breakdowns provided and the the flood risk searches obtained relevant to clients owning, or looking further information covered in the by solicitors, the question remains to acquire, commercial leasehold results. as to the level of detail which should property where insurance and repair Most importantly, when reporting be included in our flood risk due decisions will often turn on the results, it should be made clear to diligence. Although it is clear that we landlord’s leasehold obligations and, the client that we are not qualified to should not be advising on technical if relevant, any finance requirements. advise on technical matters regarding matters, it is unclear what, if anything, Many solicitors are therefore also the results and that specific enquiries we should be advising on. Clients will obtaining more detailed flood risk should be raised with their surveyor or undoubtedly appreciate some guidance searches which include detail on a the consultant who prepared the report. on the possible cost of managing flood greater range of flood sources, the The Law Society guidance recommends risk in order to decide whether to depth of flooding in the relevant area, that we suggest to clients that they proceed with transactions involving the impact of flood defences, and an should ‘discuss the level of risk to properties at risk of flooding. For assessment of the risk of flooding. which the property is exposed with example, some clients may be wholly However, the information covered in their building surveyor or, if necessary, deterred from proceeding based the searches available from commercial a flood risk assessment consultant’, the on a desktop search result without search agents, as well as the search implication being that responsibility for understanding possible flood risk cost, varies. Furthermore, the market assessing and investigating risk mitigation and insurance options. for commercial flood searches is not currently regulated. Although the Law Society guidance What to consider when obtaining highlights that such searches issued by commercial search providers are a desktop flood search more likely to include greater detail • How understandable is the information provided? To be readily understandable the and be property specific, it does not search should include an assessment of the raw data. specifically recommend that separate flood risk searches are carried out in • Cost and turnaround time? addition to environmental or flood screening searches. As such, the onus • What data set is included? Look for detail of surface and groundwater in addition therefore lies on the individual solicitor to coastal, river and reservoir flooding, the risk of flooding, and flood defences to endeavour to choose the appropriate and what they protect against. Check whether the data is sourced from the Environment Agency or from private flood consultants which often include a more type of search for each transaction. comprehensive record of flood defences in different areas and how they affect Where proceeding with a specific different properties. flood search, it is important to ensure that you have investigated the search • Does the result include recommended next steps, such as obtaining a flood risk agents used, the data sets covered by assessment for planning purposes? the search and their accuracy, and the search agents’ terms of business • Check the accuracy of the data and the search agent’s disclaimer. and any exclusions from liability.

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whether a deed of variation is Consider providing the following appropriate. Lenders are increasingly likely to advice where there is a risk of flooding investigate the risk of flooding and account for this in their valuation. • Further investigation by the client’s surveyor. Lenders will usually specify their • Consider terms and costs of buildings insurance covering flood risk for the requirements regarding insurance, property and advise client to consider any insurer requirements or limitations. such as confirmation that flood risk is specifically covered by the • Advise client to consider the costs of flood risk mitigation measures and report building insurance for the relevant on any such measures (if any) the seller/landlord has taken. property. Such requirements should be highlighted to clients obtaining • Renegotiate commercial terms such as purchase price/premium to account for finance to be secured against property. costs of mitigation measures and buildings insurance premium, or make the Before exchanging contracts, or contract conditional on implementation of such measures. entering into any security with the lender, clients should ensure that they • Clearly set out responsibility for insuring against, and repairing, damage caused by flooding in a lease and advise the client of the default position where the lease is have investigated the availability and silent. cost of any insurance required by the lender.

Changes to flood risk insurance What to consider when designed to slow down or prevent With the increased incidence of there is a risk of flooding water ingress, or resilience measures, flooding, and more sophisticated Once it is established that there which aim to reduce damage caused flood risk assessments commercially is a risk of flooding, what level of by flooding. available, insurers are looking to review their flood insurance premium structures, which may lead to fluctuations in premium rates. Possible Before exchanging contracts, or entering into any changes to flood insurance costs and terms should therefore also be security with the lender, clients should ensure that flagged to clients before entering into they have investigated the availability and cost of binding contractual arrangements any insurance required by the lender. regarding property susceptible to flooding. Until June 2013 the government and ABI had worked on the basis of an agreed Statement of Principles, advice should a client expect from When acting on a leasehold which covers the UK and had been their solicitor? transaction in respect of property running since 2007. It set out the basis The Law Society guidance which may be at risk of flooding, on which cover against flood damage recommends raising further enquiries suitable lease terms should be would be provided for most domestic where relevant, suggesting that negotiated to protect the client’s and small business policyholders. landlords/sellers should therefore interest. The lease should clearly Essentially, the Statement of Principles be asked to comment on any allocate responsibility for insuring provided that insurers would continue recommended flood risk mitigation against damage caused by flooding to renew existing customers’ home measures identified in any survey. and on what terms, specify the insurance on the same terms if the Depending on the results, it may steps that must be taken to repair Environment Agency (or Scottish also be appropriate to suggest that damage caused by flooding (both Government or Executive of Northern a client instructs a surveyor to carry when it is and is not covered by Ireland where relevant) considers the out further, site-specific investigation insurance), identify who is responsible relevant property to be outside the risk to understand the level of risk and for the cost of repair where insurance of flooding, or, where there is a risk of possible mitigation measures. does not cover flood damage, and flooding, there are plans to improve Another appropriate step is state how long the parties are flood defences so as to reduce that to suggest that clients review the expected to wait until they may risk in five years. The Statement of commercial terms of the transaction, terminate a lease if reinstatement Principles applied to all homes such as the premium or purchase has not completed. Where a client and small businesses built before price, in light of the cost of flood is acquiring an existing leasehold 1 January 2009. risk mitigation steps or an increased or reversionary interest in property The Statement of Principles insurance premium. Equally, a at risk of flooding, and such matters technically expired on 30 June 2013 contract could be made conditional on are not clearly dealt with in the and many insurers are keen to revert the seller/landlord implementing any lease, the client will expect advice to a risk-based market for flood necessary flood resistance measures, on the ‘default position’ and on insurance. The ABI and the government

16 Property Law Journal April 2014 Flood risk have therefore been negotiating an allocate responsibility for investigating on any legislation or new statutory alternative scheme to give and reporting on flood risk to clients. instruments introduced incorporating homeowners access to affordable flood insurance even where the property is considered to be at risk of flooding. If the Memorandum of Understanding is On 27 June 2013, Defra published a consultation paper seeking views implemented in full, flood insurance for such on various proposals to secure properties may move to a risk-based market and the affordable flood insurance, and the ABI-preferred option was to pursue insurance premiums for higher risk properties could a subsidised reinsurance pool for well increase markedly. This should be highlighted to high-risk households (Flood Re). A clients when relevant. Memorandum of Understanding was therefore issued on 27 June 2013 setting out the basis on which this scheme will operate. The key features of Flood Re are set out Clients should also be advised the principles of the Memorandum below. If necessary, the relevant to investigate the availability and of Understanding, advised of the measures will be introduced using cost of flood insurance before potential future costs of flood secondary legislation issued under exchanging contracts and, depending insurance in high-risk areas. n Part IV of the Water Bill, the draft of which was also published on 27 June 2013. Key features of Flood Re The important point to note is that, at present, insurance premiums • It will be run and financed by insurers as a not-for-profit fund to support the for small businesses, leasehold highest risk households. premises and higher-value homes are still covered by the Statement of • It will cap the highest risk households’ flood insurance costs, with the caps differing by council tax band so that those in small properties pay less than Principles and are therefore subsidised those in large properties and with the level of excess being controlled between by those for other properties. If the £210 and £540. Memorandum of Understanding is implemented in full, flood insurance • The scheme will only cover council tax bands A to G, ie it will not cover homes in for such properties may move to a the highest council tax band H. risk-based market and the insurance premiums for higher risk properties • There will be a gradual annual increase of the maximum premium. could well increase markedly. This should be highlighted to clients • To help fund the scheme, member insurance firms will be subject to an annual when relevant. £180m charge which will be passed back to customers at an average cost of £10.50 The government published a per annum on all home insurance policies, ie home owners insuring properties at risk of flooding will pay the same additional premium at those insuring properties consultation on the draft clauses for subject to a low risk of flooding. the Water Bill in September 2013. At the date of writing this article, • The government may fund losses exceeding the agreed aggregate threshold, though the draft Water Bill is still being details are yet to be agreed. considered in the House of Lords. • The aim is to get Flood Re running by summer 2015 and ABI members will Conclusion continue to meet their commitment under the current Statement of Principles in Flood risk and insurance look the meantime. set to become matters solicitors will increasingly be required to • Flood Re will only cover homes, ie not properties occupied by small businesses. comment upon. Given the range • Homes built after 1 January 2009 will not be covered to avoid building in flood risk of property searches available to areas. establish risk, there needs to be greater guidance on what solicitors • Neither will Flood Re cover buy-to-let landlord, holiday lets or leaseholders. must investigate, as a basic minimum; what level of client authority is • Flood Re will not cover damage caused by large-scale flooding above a required before proceeding with one in 200 probability (approximately six times worse than the flooding any site-specific search; and the in 2007). level of detail solicitors should be required to report on. Linked to this • The intention is that there will be a gradual transition toward a more risk-reflective final point is the need for solicitors policy in 20-25 years. and surveyors to coordinate and

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