Law: Disquiet on the home front

The property market is shaping up for recession.
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The Independent Culture
BE WARNED, all those who are about to launch themselves on to the precarious waters of the housing market. Recent statistics indicating a slowing down of property sales have brought back painful memories from the property recession of the late 1980s and early 1990s and the spectre of negative equity.

Whether they are applying for a mortgage, or seeking a valuation of the property they are about to sell, they will be dealing with companies battered by memories of unrepaid loans, valuation negligence claims, and fraudulent mortgage applications.

Building societies, chartered surveyors and solicitors are still reeling from the wave of litigation arising from the last property recession, and the representative bodies for each profession have either developed, or are in the process of developing, guidelines to ensure that they are less likely to end up in court the next time.

Earlier this year, the Royal Institute of Chartered Surveyors made it compulsory for all private practices to establish in-house complaints handling procedures, with external mediation, or, in cases which cannot be settled by those procedures, arbitration to determine allegations of negligence.

The Council of Mortgage Lenders reports that since the early Nineties, banks and building societies have responded to the rise in arrears and repossessions by cutting down on 100 per cent mortgage loans, and subjecting applicants to more rigorous credit checks.

Mortgage lenders have also placed a far heavier burden on solicitors to guarantee the credit-worthiness of clients and to establish a clean bill of health for the property.

Alison Crawley, head of professional ethics at the Law Society, says it will be considering a measure which will mean that a solicitor can only act for a borrower and a lender if this burden is reduced.

For those who want salutary tales, a case heard last year -- Coventry Building Society vs William Martin & Partners - is a classic illustration of the problems which buyers can come up against when caught in the battle between mortgage lenders and surveyors.

On 17 July 1989, a professional surveyor from William Martin & Partners had valued a property at Upper Richmond Road, Putney, south-west London, at pounds 325,000. As a result, Coventry Building Society had lent pounds 243,750 to the purchasers, who had granted a mortgage of the property as security.

The loan was made on the purchasers' own certification of income - but subsequently, they fell into arrears. The house was repossessed, and resold in 1992 for pounds 145,000, and the building society sued the surveyors for the difference.

One of the reasons that the building society won the case was because the valuer was considered negligent for not taking into consideration the fact that market conditions were going into decline.

David Hartfield, a solicitor at the London firm Hartfields, asserts that this was a common phenomenon. However, he said: "I don't think this will happen again. The valuers have learned a very expensive lesson, and they are now making much more conservative estimates."

Although the situation may seem bleak, the jury is still out on whether the market is heading for freefall.

Charlotte Capstick, a leading professional negligence lawyer at Berrymans Lace Mawer, says: "It is too soon to say that we are entering a property recession.

"We are merely entering a more stable period which contrasts with the over-heated rise in house prices that has been experienced recently."

A spokesman for the Nationwide Building Society agrees: "We recorded a fall in prices in August of 0.5 per cent - the first fall in 20 months. But prices are still 9.2 per cent higher than they were a year ago."

However, indications are rife that the market is - at the very least - entering a stagnant period. Last month, Hambro Countrywide, one of Britain's largest estate agencies, showed that it had lost pounds 880,000 between January and June 1998, which was in stark contrast with its pounds 3.5m profit in the second half of 1997.

Even so, Paul Taylor, also a solicitor at Berrymans, points out that if predictions are correct, the situation should be better this time round.

"The 1980s was the time of great greed. People were buying properties at pounds 100,000 and expecting them to fetch pounds 200,000. When prices dropped, some surveyors were still over-valuing," he says.

Roger Ennals, a solicitor at the Essex firm of Sparling Benham & Brough, is also sceptical of a return to the problems of the past. "Overall, people are still cautious and within the last three years, lenders have tended to undervalue properties. Because of this, I don't perceive that there will be a huge rise in litigation. Essentially, I think it's just a blip."

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