Building contracts and retention monies

The building owner or one of the appointed surveyors can log into the account on our portal and navigate to Payments in the left hand menu. Clicking on New Payment Request opens a form asking for details of the payment to be made. We will issue a payment direction 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.

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 because 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.

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

The adjoining owner gives written notice under Section 12 of the Act requiring security for expenses;

• The owners or the surveyors appointed under the Act agree the amount to be provided as security and in what form;
• Before the work starts the person giving security for expenses deposits the agreed sum with us;
• When the work is complete the surveyors direct us to release the money back or to pay some or all of it to the other party and then release the balance;
• 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 at a statutory tribunal.

Our role is simply to hold the security and to release it as directed by the parties or, in the event of dispute, the surveyors exercising their statutory authority under the Act.

You can download a detailed analysis, written by Michael Rust of Security for Expenses Ltd., of how security for expenses has developed under the Act here.

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 account until the work has been completed.

The term “escrow” is generally understood to refer to an agreement between parties to set aside a sum of money to be held by a third party until certain conditions are met.

The Financial Conduct Authority describes “escrow” as: “a payment service consisting of the transfer of funds from a payer to a payee, with the platform holding the funds pending the payee’s fulfilment of certain conditions or confirmation by the payer.” This is the service Security for Expenses Ltd. provide.

(In legal terms, this is not strictly accurate as in English Law “escrow” refers specifically to the conditional delivery of a deed after execution; that is where a deed only becomes binding once one or more conditions have been fulfilled.)

The short answer is no but some explanation is warranted.

Holding security is “Money Remittance”, a regulated financial activity under the Payment Service Regulations, and anyone doing so must be registered with the Financial Conduct Authority (FCA) and supervised for anti-money laundering by FCA or HMRC. The exceptions of “occasional or very limited basis” and “ancillary to another business activity” do not apply to money remittance.

There is a misconception that the Royal Institution of Chartered Surveyors (RICS) as a Designated Professional Body (DPB) under the Financial Services and Markets Act 2000, can license members to issue e-money which could allow them to hold security. The RICS DPB scheme, however, is approved by HM Treasury solely to regulate general insurance distribution in the UK, and nothing else.

It is now very easy to check if someone is registered with a couple of clicks on the FCA Firm Checker service. Under the service category “Payments and e-money, for example, online wallets and money transfers” check that the firm has permission to “Transfer money for you without you holding an account”.

Be sure to check “What this firm can’t do” as some permissions do not allow firms to make payments without your consent which rather defeats the object of security for expenses!

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. This is controversial among surveyors as it undermines the surveyors’ statutory authority to deal with any dispute that arises. As with any insurance policy, a loss adjuster will be appointed to investigate any claim and the policy seeks to give insurers the right to refer to the Third Surveyor to act as mediator.

The Act is not very helpful here and there are differences of opinion among party wall surveyors as to what kinds of expenses it is intended to cover. There have been few cases brought to court on this point but lawyers practicing in this field seem to agree that security can be required for any expenses that an adjoining owner may incur because 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.

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.

In cases where security has been requested by several adjoining owners, we are sometimes asked if this can be held in a single account. This can be done but there are several good reasons why it should not be:

• Any payment out of the security sum must be authorised by all the parties or all the appointed surveyors or all the Third Surveyors (if the same Third Surveyor has not been selected by the appointed surveyors).
• Any one of the parties or of the surveyors could prevent the release of any part of the Security Sum.
• It may not be possible to direct the release of security in respect of one adjoining property only.
• There would be no significant saving in respect of fees and the person giving security could find themselves at a serious disadvantage further down the line. It may be that the Security Sum required by the adjoining owners would be less if combined in a single account in which case, if all the parties and surveyors are happy with the arrangement, we can set up an account on that basis.

Yes. 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 are made under common law and do not have statutory authority.

Yes. 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 under one of the standard forms of building contract.

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

Yes. Developers and contractors are sometimes required to give performance bonds, for example where a road system is to be adopted by the local highways authority. In such cases, the release mechanism will be carefully defined in the bond document itself and reproduced as a variation to our standard Terms of Business in the Contract Schedule which forms part of every offer.

Yes. Litigation is often settled out of court or before coming to trial and the terms set out in a Consent Order issued by the Court. This may require a sum to be held in escrow setting out in some detail the release mechanism under which the sum is to be paid out. This will be reproduced as a variation to our standard Terms of Business in the Contract Schedule which forms part of every offer.

Yes. It is common for a tenant entering into a new lease to be required to pay a rent deposit. This can be a substantial sum to be held for a considerable period. As solicitors are increasingly reluctant to hold such funds in client accounts, it is often held by the landlord which is not always satisfactory to the lessee. We can hold such deposits and will vary our standard Terms of Business in the Contract Schedule to reflect the release mechanism agreed by the parties.

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 UK accounts at banks authorised by the Prudential Regulatory Authority (PRA) or suitably authorised by the Financial Conduct Authority (FCA).

If in doubt, this can usually be confirmed by your account IBAN number which should appear on your statement. If the IBAN number starts with “GB” it is probably a UK bank account. Where the UK bank is a branch of an overseas bank, further checks may be required in accordance with our Anti-Money Laundering Policy.

Be aware that some Money Service Businesses offer virtual IBAN numbers and are not necessarily regulated by the PRA or have the requisite permissions from the FCA. These will not be acceptable as sources of funds.

Our safeguarded client account is with one of the City’s most conservative private banks which is FSCS protected. Nearly as old as the Bank of England, it is authorised by the Prudential Regulation Authority (PRA) and regulated by the Financial Conduct Authority and the PRA. Funds are held on deposit at the Bank of England. If this bank were to fail, FSCS may be able to step in and pay compensation in respect of those safeguarded funds.

Security for Expenses Ltd. itself is not covered by the FSCS because it is not a bank, building society or credit union.

However, as an FCA registered Small Payment Institution, we keep your money in a safeguarded client account reserved for customer money so security money held is not part of the company’s assets. This means your money remains your money and is segregated from the money we use to run the business. In the unlikely event that Security for Expenses Ltd. was to become insolvent, the money would still  be available to repay the person that gave the security and any third party as directed in the release mechanism.

Log into your account on our portal and navigate to Payments in the left hand menu. Then click on New Payment Request and fill in details of the payment to be made. We will issue a release form or payment direction for online signature via Signable, a UK based, secure, document signing service. Where security is being held under the Party Wall etc. Act, 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.

If we are directed to release the security sum in full, we will make a trial transfer of £10 to the originating UK bank account usually within three working days. When the person giving security confirms receipt, the balance will normally be transferred on the next working day.

If any money is to be transferred to a third party or a bank account different from the one from which funds were originally transferred, KYC checks must be made before funds can be released. It may be simpler for the person who gave security to satisfy all claims beforehand, so the surveyors can direct that security is returned without delay to the originating account without any further checks being necessary.

No interest can be paid or credited to any customer as we would then be offering savings facilities to our customers. The FCA considers that we would not then be holding funds “only in relation to payment transactions” and would be in breach of regulation 33 of The Payment Service Regulations 2017.

Because we hold clients’ money in our client account purely as a 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.

Any interest earned in the account is retained by Security for Expenses Ltd. A proportion is held as capital reserve in anticipation of likely changes in regulatory requirements. Some is used to meet running costs and keep fees down and some is given to charity, principally UNICEF and Feedback Madagascar.

Our contract is with the person or entity from whose account the Security Sum is transferred. We do not accept payments from intermediate Payment Service Providers (PSP). If a third party, for example a family member or parent company, is to be the person giving security we will carry out KYCDD on the third party as well as the party who has been required to give security but our contract will be with the third party person giving security.

If the third party is a managing agent or solicitor acting as agent for the person giving security, we will require evidence of its authority to make such payments. Payments by commercial agents are defined in The Payment Services Regulations (PSR) 2017 as an activity which does not, in itself, constitute a payment service. Our processing of that payment is, nevertheless, a payment service under The Payment Services Regulations.

We do not accept payments from consultants or contractors engaged by the party required to give security.

This will not usually be a problem provided they have an account at a UK bank authorised by the Prudential Regulatory Authority (PRA) or suitably authorised by the Financial Conduct Authority (FCA).

If in doubt this can usually be confirmed by the account IBAN number which should appear on the bank statement. If the IBAN number starts with GB it will be a UK bank account. Where the UK bank is a branch of an overseas bank further checks may be required in accordance with our Anti-Money Laundering Policy.

In the case of overseas entities, the applicant will have to submit official entries from the regulators of the overseas jurisdiction confirming the directors, shareholders, nominees, etc of every entity in the chain of ownership together with ID documents of all controlling individuals. In our experience this can be a very long chain with links in several jurisdictions.

Until we start the process, we have no way of telling how many entities or individuals will be involved and we will ask for a payment on account to cover abortive KYC investigations. This currently stands at £1,500 plus VAT.

In the case of trusts, under The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, we are also required to verify the identity of each of the following:

• The settlor
• the trustees
• The beneficiaries
• Where the individuals (or some of the individuals) benefiting from the trust have not been determined, the class of persons in whose main interest the trust is set up, or operates
• Any individual who has control over the trust.

For each person, we require a copy of their passport or other photo ID giving their date of birth and a second document confirming their address.

According to the Treasury and Home Office “National Risk Assessment of Money Laundering and Terrorist Financing 2020”:

“Evidence has demonstrated the laundering of millions of pounds through UK legal entities established by TCSPs. The risk of TCSPs being used to facilitate money laundering is therefore rated high.”

This is because overseas TCSPs are not subject to UK money laundering regulations.

Unless the TCSP is itself regulated by HMRC or the FCA, we are unable to rely on transparency for anti-money laundering purposes and we must unravel the ownership structure to identify the Ultimate Beneficial Owner (UBO). This means that the applicant must submit official entries from the regulators of the overseas jurisdiction confirming the directors, shareholders, nominees, etc of every entity in the chain together with ID documents of all controlling individuals. In our experience, this can be a very long chain with links in several jurisdictions.

Until we start the process, we have no way of telling how many entities or individuals will be involved and we will ask for a payment on account to cover abortive KYC investigations. This currently stands at £1,500 plus VAT.

KYC stands for Know Your Customer and it is the process we go through to ensure all our customers are exactly who they say they are and are not using the service for money laundering.

Under The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, every Payment Service Provider must take steps to know their customer (KYC) by verifying the identity of all ultimate beneficial owners (UBO) and the source of funds.

If you are not being asked to undergo KYC due diligence, your escrow service is unlikely to be regulated and is probably acting unlawfully.