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In ‘Climate Change Reports: The New Frontier of Real Estate Due Diligence’, Alexandra explores the conveyancing point of view and how the scope of lawyers’ responsibilities in the property transaction process could be expanded.
Read the full report here.
First published in the Landmark Information Group whitepaper ‘Climate Change Reports: The New Frontier of Real Estate Due Diligence’.
Searches have long been the responsibility of property lawyers, but as climate change reporting evolves to potentially garner a new generation of searches and risk data, who is best placed to interpret the risks? Do we need to rethink the roles and responsibilities right across the property transaction process and put education, awareness and collaboration front and centre?
The risks inherent in climate change will leave few industries untouched, and property law is no exception. When we zoom into conveyancing specifically, climate change brings a new set of risks, challenges and questions – some of which currently have no clear answer. From the conveyancing lawyer point of view, we are already obliged to consider risks such as floods in the standard searches that we order for our clients. What’s changing is the sense that we might need to be forward-looking rather than just reporting on what’s happened in the past. But right now, that’s all crystal ball gazing to a large extent.
For me, the main question is: is climate change risk truly a legal issue? Theoretically, not really; it has nothing to do with the legal title of a property, which is our primary concern. But in practice, lawyers are increasingly likely to find themselves obliged to do more and more searches around climate change risk. The challenge for property lawyers is that we are not climate risk scientists, so we are limited as to how exactly we can advise our clients in response to the risk data that is emerging.
Risks like subsidence are likely to increase as climate change alters our landscapes and challenges the physical environment with extreme temperatures, flooding and other weather events. But while each property buyer needs to understand the impact (or likely impact) of climate change on their purchase, this boils down to a surveying issue, not a legal title issue. Despite this, due perhaps to the way things have always been done, it could mean that any additional searches that would surface climate change risk factors have to be handled by lawyers, who are ill-equipped to advise on surveying matters.
As a lawyer, I can make sure clients are thinking about the potential impact of climate change on property and advise them on which reports are available, but surveyors, and possibly climate change experts, are likely to be the ones who will have to interpret the results.
So what we will need is collaboration across the whole sector, to make sure that all parties involved in the conveyancing process are aware of the risks, their potential impacts, and what can be done to mitigate, or minimise, those risks.
For commercial transactions, companies and corporates are generally alert to the issues around climate change risk and property. The greater risk is the Smith family down the road, buying a house and not being aware of the impact climate change could have on it.
But to some extent, the responsibility must rest with the buyer. For most people, a home is their biggest ever investment, so they should do their homework: they might check local crime statistics or find out Ofsted ratings for local schools. These are the kinds of checks and measures that homebuyers already accept they will have to undertake, to ensure that it’s the kind of area they want to raise a family in, or retire to, or settle in for a few years. They wouldn’t expect to involve a lawyer in these aspects.
So, when it comes to climate change, is that any different to the kind of due diligence that homebuyers themselves undertake? Should they not be factoring climate change into the same decision-making process? Well, in theory, yes. But to the average homebuyer, it’s unclear where they would even start to assess climate change risk – except the flood risk reporting that’s part of any environmental report. Which orientates the issue back to lawyers, who order those searches.
Lenders clearly will have a vested interest in climate change risks relating to the properties they’re lending on. They are very savvy: to make good decisions on whether to lend on a property, they know they must be aware of climate change impacts like flooding or coastal erosion. I imagine that future reports on these risk factors could be driven by lenders rather than by individual buyers. If the property is on a cliff or by a previously flooded river, an individual buyer is likely to be prompted to consider climate risks, but most people simply are not thinking about the potential droughts that might increase their risk of subsidence in 20 years’ time. Education is key.
It is clear that we need a significant cultural shift, with people educating themselves – or being educated – to understand risks better. With the right awareness and understanding, people can know their immediate and long-term risks and make informed decisions and plans accordingly.
We already know a bit about the basic physical threats of climate change – flooding, coastal erosion. But, as the unprecedented temperatures of summer 2022 have shown us, we don’t necessarily know how a building might perform in heat. Buyers need to be making the link between extremes of temperature that are inevitable with climate change and recognise that if a house is fully insulated, it will not only keep them warm in winter, but also be cooler in the heat. EPCs have helped raise awareness of energy performance, but we do need homebuyers to be more invested in what they really mean, and not just whether they have an acceptable rating as a tick-box exercise.
While physical risks and their impact are very much visible, transitional risks feel quite vague at the moment. We know rental properties need that EPC ‘E’ rating, which is likely to rise to a C, and then a B for commercial properties, in future. But, other than EPC ratings, it’s difficult to predict what’s on the horizon. It’s also important to remember that policy ideas are different to action. Something being discussed now might take years to come in – if ever – or it might happen tomorrow.
If I was going to buy a property today, I would want to know more about the data that any report was based on. I’d want to know best case and worst-case scenarios – and an understanding of the middle ground, to grasp whether the report was pessimistic, overly optimistic or realistic.
The standard reports we currently have reference historic events, so they have an element of certainty to them. Climate change, on the other hand, is happening now and as such, reports cannot rely on historic events to guide us. So, is it guesswork or science that we rely on for future gazing the risks of climate change?
My concern is that if the future gazing errs towards overly pessimistic, it could really affect the value of the property, the mortgage ability and the saleability of it. On that basis, and without the legislation to demand it, you can understand why people might not want that kind of report, preferring instead to stick to what they know has happened in the past. However, with climate change a clear and present risk, that is not a prudent course of action.
The reality is, whatever reports we choose to guide the conveyancing process, there is always more than one answer – an entire spectrum of scenarios. Maybe a property is pretty near a cliff but there’s been barely any erosion in decades. Maybe it’s in an area that nearly flooded recently, in which case there is some certainty that it will be affected.
The ideal scenario, ultimately, is for relevant and adequate information to be available to buyers and for the right parties to be on hand to interpret it and advise on that basis. I would suggest that this should not solely be the domain of lawyers and a more collaborative approach is needed.
So who is best placed to interact with climate change reports in the property buying process? Surveyors already take on some responsibility for reporting the condition of the property and how that might change. Maybe they should also be thinking about the potential impact of climate change on that property.
It is worth remembering that lawyers rarely visit a property; our interaction with a property tends to be at the level of the legal title, at where the boundaries are and whether there are any rights of way crossing the property. Are these likely to change in any way due to climate change? No. But might the material structure of the building be affected? Almost certainly. This angles us back, then, to surveyors.
Lenders have mitigation measures in place so that properties don’t become unsaleable or unsuitable for lending. In the future, if a property is in a potentially impacted area, lenders might begin to insist on more detailed surveys in those cases. If that is the case, surveyors could start to look more widely at the risks as part of their standard way of working: as well as suggesting the house needs a new roof in five years, for instance, they could look at the insulation to decide to what extent it would be inhabitable in a heat wave. It will be interesting to see how RICS guidance shapes up in relation to these thought processes.
Right now, we have a clear and present danger of climate change risks. We have homebuyers who are unlikely to concern themselves too deeply with those longer-term risks unless required to by law, or by their lender. We may see, in the future, sellers being required to provide not only EPCs but also climate change reports per property.
However, unless climate change reports are meaningful, and provide guidance on mitigation measures, there is a risk that they could render some properties unsaleable, or unmortgageable; something government will want to avoid, especially given the current housing crisis. Education on climate change and investment in mitigation measures is needed, including schemes to make the installation of improvement works affordable for homeowners. The industry will need to work together to make sure that the system stays fit for purpose.
Alexandra Holsgrove Jones
20 October 2022
Publications 24 NOVEMBER 2022