Flood Risk: Plain and Simple
Tue 29 Sep 2015
After one of the rainiest Augusts on record, what can be done for developers to help mitigate flood risk?
We are all aware (particularly after a summer that required even the hardiest socks-and-sandal fan to dig back out their wellies) that flooding is these days something to be taken seriously. Flood risk can make everything more difficult when it comes to property: mortgages, insurance, sales and developments can all be complicated by flood risk.
It’s not only riverside developments that are at risk either: experts estimate that one in six homes in England are at risk of flooding from a variety of sources, including surface water flooding due to drains struggling to cope with heavy rainfall and groundwater flooding from underground water levels rising above surface levels.
There are, however, a number of sources of information available to a potential purchaser of a site. The Commercial Property Standard Enquiries require a seller to disclose details of any flooding of which it is aware and if it has experienced any difficulty in obtaining insurance at normal rates. The Environment Agency also makes public information about flooding from rivers, the sea, surface water and reservoirs, but not ground water flooding.
The main source for a diligent developer, however, is via a specialist flood search. These can be ordered at the same time as the other standard conveyancing searches and can provide information about all kinds of flood risks, including surface water and groundwater flooding information, and should also provide an assessment of the likely risk of flooding. Where these disclose the likelihood of an issue, a specialist survey can then be commissioned to pin down likely risk and advise on mitigation of exposure and suggested anti-flood measures.
Some, however, may be hoping that the insurance industry’s long-awaited Flood Re scheme may provide some comfort to those who find themselves looking at or already in possession of land at high risk of flood. There has been a Statement of Principles in place between the Association of British Insurers and the government since 2000, relating to the insurance industry’s commitment to continue to make flood insurance for domestic properties and small business available.
However, this Statement of Principles was never envisaged as a long-term solution to the issue of insurance for flood-prone properties. This instead comes in the shape of Flood Re. Flood Re is a not-for-profit reinsurance scheme which shares some similarities with the long-running Pool Re scheme, which provides reinsurance for terrorism damage.
Flood Re will be managed by the insurance industry and will cover households at significant (more than 1 in 75 year annual probability of flooding) risk. Insurers will be able to transfer the portion of the premium paid for flood risk into the scheme. Flood Re will then reimburse the insurer for any flood claim paid out under that policy. From the customer’s perspective, little will change: they will still deal with their chosen insurer in the usual way, and will have no direct contact with Flood Re.
Whilst this will sound to those who live in flood prone areas like a godsend, Flood Re will be funded by a measure that some will find unpalatable: a levy on all household insurance premiums, regardless of whether a household is at risk or not.
However, there are inevitably exclusions and exceptions from Flood Re. Defra indicated last year in a briefing on the subject that the following would be excluded:
- Properties in Council Tax Band H;
- Leasehold properties;
- Commercial properties;
- Properties built after 2009; and
- Existing non-residential properties converted to residential after 1 January 2009.
Inevitably, the most controversial of the exceptions was that relating to leasehold properties, given the prevalence of these in this jurisdiction. Further guidance was therefore subsequently issued to indicate that these can be included in Flood Re, provided that either the owner (or their immediate family) lives in the leasehold property in question and takes out the buildings insurance in their own name or that the building consists of less than four flats where the freeholder either lives in one of the flats or the insurance is purchased by a leaseholder who also owns a share of the freehold.
Notwithstanding this clarification, there are still obviously a large category of leasehold properties which are not going to benefit from Flood Re, such as any block of flats run by a commercial managing agent. Most significantly for property developers, the restriction on new-build properties means that Flood Re will not come to the rescue on schemes that are likely to be at significant risk.
Flood Re was initially anticipated to come into operation in 2015 but has been delayed by the general election and ongoing discussions about its terms and form. Given its extensive carve-outs and caveats, it is not the catch-all solution that many in the property industry would wish to see. Law Society guidance indicates solicitors should mention flood risk to clients and make investigations as normal conveyancing practice and this will presumably remain the case for the foreseeable future.
Prudent developers will not only instruct their solicitors to carry out flood searches, but will also consider mitigation of any risk long before this is considered as necessary as part of any planning application. On a personal level, householders should not believe that they will be able to rely on the Flood Re scheme as a cover-all to ensure competitive premiums will be available to them regardless of their level of risk.