Transfers without tears

One of the most contentious issues in large scale voluntary transfers is the requirement for the transferring council to give title warranties to its transferee and to the transferee's funders. The reasons are simple: councils are asked to warrant matters they are not able to verify (for example, the risk of contaminated ground) and face large liabilities if a warranty is found to be wrong.

Given that the asset – the land and housing stock – will have passed to the transferee, it is understandable that councils are reluctant to be left with all the risks.

Warranties are also very important for the transferee. Its business plan will not provide for the risks covered by the warranties and it will have no way of dealing with a problem should one occur. Naturally, funders will be reluctant to lend in such circumstances.

The matter is usually resolved by intensive last-minute negotiation with victory to the side that doesn't blink first. This often leaves the parties at loggerheads when they should be working together for the benefit of the area's tenants and residents. It is time for a fundamental rethink of the process.

Title warranties were introduced in LSVT as a way of avoiding the amount of time and effort that would otherwise be required for the transferee and its funder to investigate the council's title. The idea was that as councils had owned the housing land for many years, the likelihood of any title problems was remote. Reliance on title warranties was seen as a sensible and pragmatic solution.

However, other factors came into play. The Environment Act 1990 introduced concerns about environmental risks and subsequent legislation has increased such concerns. Transfers started occurring in urban and industrial areas, which increased the environmental risks substantially. In seeking the "best" deal for their clients lawyers often turned this issue into a battlefield.

It is worth examining the content of these "title" warranties, because the name is misleading. A conventional set of LSVT warranties will cover matters such as:

• the council's ownership of the land (title)
  
• all planning permission and building regulations consents being in place
  
• liability for the costs of maintaining unadopted roads and drains, including pumps and septic tanks
  
• the accuracy of the information provided to the stock condition surveyors and to the funders valuers
  
• environmental warranties
  
• a "vires" warranty, meaning that the transfer and all related transactions are within the council's powers.

Councils and their transferees end up at loggerheads when they should be working together for the tenants and residents

The deeds of warranty will set out how and when a claim can be made, the time limit for making claims and any caps on the amount that can be claimed.

These vary, but in general transferees get warranties for shorter periods and with tighter caps than their funders. It is rare for funders to accept any restriction on their right to claim under their (collateral) warranty, including any financial cap. In theory, councils can disclose matters where they know they are technically in breach of a warranty. In practice, disclosures are fiercely resisted by transferees and their funders, who will seek to limit the effect of the disclosure, thus preserving their right to sue the council. Often an attempt to disclose will trigger a demand for additional indemnities over and above the warranties.

The issues can be summarised as follows:

• the warranties go beyond mere title
  
• they are couched in absolute terms and the council isn't allowed to disclose against them
  
• legislative changes have increased the risks
  
• the liabilities are substantial.

How to make this difficult issue more manageable? A good start would be for all parties to recognise the other side's concerns and address them with something more flexible than unlimited liability warranties.

In several recent transfers, innovative approaches have been developed, including:

• using the receipts from VAT shelter schemes to cover risk
  
• buyback options if a dwelling is found to have defective title or be contaminated
  
• mitigation clauses enabling the council to have an input into any remedial solution involving environmental contamination (instead of simply paying up under warranties)
  
• getting the transferee to insure against environmental risk (avoiding the need for the transferee to sue the council in order to claim under the policy).

One solution would be a set of "industry standard" warranties. However, this would not tackle the specific issues that arise in each transfer. A bespoke solution is preferable, although this would involve more work and cooperation between the parties.