What is Security for Expenses?

We use the term Security for Expenses in specific circumstances that fall into three categories of Transaction:

  1. Under the Party Wall etc. Act 1996 (the Act)
  2. Under a Licence
  3. Under a Building Contract


Security under the Party Wall etc. Act 1996

When used in the context of Section 12 of the Party Wall etc. Act 1996, it applies only when a building owner wants to carry out work that must be notified to an adjoining owner under the Act.

Before any such work is started the adjoining owner may require the building owner to give security for any expenses that the adjoining owner might incur as a result of the works. In exceptional circumstances, the building owner may require the adjoining owner to give security for the cost of additional work included at the request of the adjoining owner or if the adjoining owner is responsible for part of the cost of works to a party structure.

A request for security for expenses must be made in writing before work starts.


How does it work?

Every case is different and there are many possible alternatives but in most cases the matter will proceed as follows:

  1. The adjoining owner gives written notice under Section 12 of the Act requiring Security for Expenses,
  2. The owners or the surveyors appointed under the Act agree the amount to be provided as security and in what form,
  3. Before the work starts the person giving security for expenses (the “PGS”) deposits the agreed sum with us,
  4. When the work is complete the surveyors direct us to release the money back to the PGS or to pay some or all of it to the other party and the balance to the PGS,
  5. The money is released as directed and the account is closed.

The Act sets out a detailed procedure for the appointment of surveyors to resolve actual or technical disputes between the parties and any dispute over the release of money held as security will be resolved by the surveyors as a statutory tribunal.

Our role is simply to hold the security in “escrow” and to release it as directed by the surveyors exercising their statutory authority under the Act.


What form does Security for Expenses take?

Exactly how security is to be provided can be agreed by the parties or, more commonly, the surveyors. The most secure form is for an appropriate sum of money to be agreed and then deposited by the building owner or adjoining owner as appropriate in a secure “escrow” account until the work has been completed. Traditionally this has been held in the client account of one of the parties’ solicitor against a “solicitors undertaking” that the money will only be released as agreed by the parties or directed by the surveyors.


Why can’t my solicitor hold the money?

In December 2014 the Solicitors Regulatory Authority (SRA) issued a warning that effectively barred solicitors from holding money as security for expenses under the Act unless they were also providing legal advice in the matter. If your solicitor is advising you in this way, then they can hold security for expenses in the traditional manner. It is unusual, however, for solicitors to be involved in party wall matters unless things have gone badly wrong or the project is particularly complicated.


Can the Surveyors hold the money?

If one of the appointed surveyors is an employee of a firm regulated by the Royal Institution of Chartered Surveyors (RICS) which has a client account under the RICS regulatory scheme, then that surveyor can hold security in that client account. New guidance from RICS came into effect on 1 January 2020 and can be downloaded here. A Chartered Surveyor who is not one of the surveyors appointed under the Act is not authorised by RICS to hold security in a client account.


Can Security for Expenses be provided by an insurance policy?

Contractor’s insurances, householder’s third-party liability and “Renovation Insurance” policies do provide some security but most insurance policies of this kind offer protection against negligence and problems can arise if the contractor has not been negligent. Special “non-negligent” insurance policies have been known to refuse to pay out because the damage was foreseeable. In practice insurance claims usually take time and do not always cover all the costs of the claimant. For these reasons surveyors are increasingly reluctant to accept insurance policies as providing an acceptable form of security.

Specific “security for expenses” insurance is available for security under the Party Wall etc. Act.


For what kind of expenses can security be demanded?

The Act is not very helpful here and there are differences of opinion among party wall surveyors as to what kinds of expense it is intended to cover. There have been few cases brought to court on the point but lawyers practicing in this field seem agreed that security can be required for any expenses that an adjoining owner may incur as a result of the building owner’s work. The most common are:

  • Expenses in making the adjoining owner’s premises safe and secure should the building owner abandon the works,
  • Expenses in repairing damage caused by the building owner’s works,
  • The expense of the adjoining owner’s surveyor’s additional fees in the event of damage being caused or other contingencies.

The basic principle is that there should be sufficient funds available to cover any costs that might arise if the building owner was to abandon the works part way through or fail to meet its obligations under the Act, whether this is to compensate for damage caused, unnecessary inconvenience, actual losses or to meet the costs of making an award under the Act.

It will usually be the appointed surveyors who specify the risks against which security is held.


Who decides how much money must be deposited as Security for Expenses?

The parties can agree between themselves the sum to be given as security but this is uncommon. Usually the surveyors will decide the sum to be deposited and will include this in their award with details of when and how the money is to be returned to the owner giving the security. If either party is unhappy with the amount determined by the surveyors, they can refer the matter to the Third Surveyor but only before the surveyors make their award. Once the award has been served, the parties can only appeal the award in the County Court.


Security under Licences for Access or Alterations

It is increasingly common for security to be required by someone who grants a licence to another party for access over their land to carry out building works or erect scaffolding or by a landlord to a tenant wanting to carry out alterations to a building.

We hold security under licences in the same way as we do under the Party Wall Act. The only distinction is that licences do not have statutory authority but are made under common law.


Security under Building Contracts

Contractors undertaking building works want to know that they will be paid but Employers are understandably reluctant to make payments in advance or on account. We can hold funds and release them to the contractor against a Certificate for Payment issued by the Contract Administrator (CA) under one of the standard forms of Building Contract.

In such cases our contract is with the Employer who agrees that we will honour without question certificates issued under the contract out of funds deposited with us.


Why can’t I send money from a non-UK bank account?

Under HMRC’s supervision of Money Service Businesses under the Money Laundering Regulations and the FCA’s rules governing Small Payment Institutions we can only accept money transfers from recognised UK bank accounts.


How do I get my money back?

When the time comes for the Security Sum to be released back to the PGS, we will issue a release form for online signature via Signable, a UK based, secure, document signing service. You will need to confirm whether the release form is to be signed by the Parties or the Surveyors so we can issue the correct form. We will then make a trial transfer of £10.00 to the originating UK bank account. When the PGS confirms receipt, the balance will be transferred, normally on the next working day.

If any money is to be transferred to a third party or a different bank account, customer due diligence will need to be satisfied before funds will be released. It will be simpler and cheaper for the PGS to satisfy all claims beforehand, so the surveyors can direct that security is returned in full without delay to the originating account without any further checks being necessary.


Who gets the interest on funds held?

We hold funds in various amounts from a few hundred pounds to several hundred thousand for different clients and for different periods. Interest earned on the total held is paid to UNICEF.

It is a contractual term of the Company’s service that any interest earned in the account is paid to a charity determined by the directors and shareholders. No interest is paid or credited to any client of the Company.

Because we hold clients’ money in our client account as stakeholder, funds are not held for investment and are not, therefore, “Custodial Accounts” as defined in sub-paragraph 1(u) of Article 1 of the FATCA Agreement 2012.