Ep.5 - Navigating Property Pickles: Flood Zones and Covenants

In this episode of Property Pickle, Michelle and John discuss the common pitfalls in property investment, focusing on planning issues that can arise post-purchase. They delve into the complexities of flood zones and restrictive covenants, emphasizing the importance of thorough due diligence and de-risking strategies before committing to a property. The conversation highlights the necessity of legal checks and the role of planning consultants in navigating these challenges.

Transcript

Introduction to Property Challenges

SPEAKER_00 0:13

Hello and welcome back to another property pickle. John, how's it going today?

SPEAKER_01 0:18

Well, um, not bad, thank you. Not bad. There's always a few challenges, but uh, you know, we battle on, we battle on.

SPEAKER_00 0:25

That's what keeps it interesting, right? Absolutely.

SPEAKER_01 0:27

Yep.

SPEAKER_00 0:28

Speaking of never a dull day. Never a dull day. Speaking of which, we have got today's property pickle, which is the title of this one is called The Planning That Was Never Checked. And here's the scenario. You bought it, you bought it, you celebrated, and then you found out that you can't build what you thought you could.

SPEAKER_01 0:50

Oldest trick in the book, that is, Michelle. Oldest trick in the book. Um, yes, uh that's this one's gonna be fun. I feel sorry for them because it it happens, you know, and it's amazing how often it does happen, especially at auction, of course. Especially at auction.

SPEAKER_00 1:06

True, and that's your one of your uh areas of expertise. So this particular pickle, a buyer secures a commercial building planning to convert it into flats. After completion, they discover a restrictive covenant and a flood zone issue that make planning far more complex than they realise.

SPEAKER_01 1:25

So okay, two problems. Which should we do first? Only two. They've done well. They've done well. I've had a few more than that on occasions. So which one should we ladies first, which one should we do first, Michelle?

SPEAKER_00 1:42

Well, do you know what? Uh the flood zone one, this caught me out. Thankfully, I never went ahead and bought this particular property, but it looked great until I realized that it was in this flood zone area and I knew that there was no way I was going to get planning on. Now, that's something that can just be really easily overlooked because it didn't look like it was, you know, yeah, near a river anywhere nearby or anything.

SPEAKER_01 2:05

No, so flood zone one, two, and three. Flood zone one, no problem. Flood zone two, probably not a problem. Flood zone three, problem. Now, I would argue that in most cases you wouldn't get planning unless you've got a flood risk assessment done, which should tell you whether even if it's a flood zone three, which is pretty unlikely, you may not get a mortgage on them when you finish them, by the way. If it's flood zones three, you shouldn't be doing it. However, there are other challenges apart from people think of flooding, you know, your house is flooded. Now, there's lots of others. For instance, there's wave surge, which I got caught out on in North Norfolk. It was a mile and a half from the damn sea. And they said, Oh, yeah, you can't have planning because a wave surge. What? It's an it's a mile and a half away. What are you talking about? Oh no, yeah, we've estimated that in 10 years' time, all this nonsense. So that's one of them. So that's one thing you've got to be careful of. The next thing you've got to be careful is coastal erosion. You know, it's um not that far away from here, Thorp Nest, lovely Suffolk, Suffolk holiday village. Um,

Understanding Flood Zone Issues

SPEAKER_01 3:16

it was having a bit of coastal erosion, but but the other the other month it lost 60 foot, and someone had exchanged had bought a house at auction that was cheap. They should have realized why it was so cheap. Anyway, they were lucky because that it fell into the sea before they completed. So they got their money back. How lucky are they? 200,000 quid. Anyway, and then you've got things like um surface water. Now, surface water, that probably wouldn't stop you getting planning, but it would be a problem. Uh, it would be a condition you need to sort out potentially, and also putting uh surface water into the drains. So on a bigger state, and if you do a big development now, you need to do what's called a suds pond, which is a pond that takes all the wall, all the rainwater from the gutters and everything else. It doesn't go into the main drains because the main drains everywhere are over capacity. So if it's a small development, obviously you can't put a pond in, you can't put a suds pond in. So sometimes they make you put a what's called a retention tank in, so the water doesn't flood into the drains too quick. So it goes into a tank, very expensive to do. I we've had to do this in the past. Then there's rain gardens. They might suggest you have a rain garden, which I never even heard of, but it basically soaks up the water, that's the whole point. Um now we've got one at the moment where we're battling with the um waterboard. I'm sure they're not called the waterboard anymore. I'm a dinosaur, but anyway, something like that, where um they're saying, well, you know, you're putting the surface water into the drains. Well, yeah, it's a town centre. What else do we do? Well, we might want you to redo the drains for us in the road. So I mean, God knows what that's going to cost. So it is an issue, Michelle, really is, and it's a much bigger issue than people realise. So I think this this person is uh whether it's you know, um, well, I I said I'm surprised they got planning on it. Um, it could be a condition. So preconditions are a massive problem um with new build, especially. Uh conversions as well, but new build, especially where the preconditions, you might have. We had one where we had 26 preconditions. We bought it auction, we knew there was a problem with it all, and not one of the 26 preconditions had been sorted out, and they'd spent one and a half million building some of these houses already. I mean, how mad is that? And they were told to stop. They went bust, obviously. So we took it over a year to get all 26 preconditions dealt with. So preconditions before you can start work, really, really important to check. So getting planning is one thing, but sorting out the preconditions is really important. So on the flooding side, you know, that's you know, that that's heavy duty, that's hard work, very hard work.

SPEAKER_00 6:03

And where people assume like permitted development, they assume it means they can it's guaranteed. But the clue is in the word permitted, you still need permission from the council. And uh unless you get that, you know, it it's not guaranteed. So again, it's coming back to having

Navigating Restrictive Covenants

SPEAKER_00 6:22

these exit strategies, and you almost want to say if you can do nothing to the property, it still needs to work as it is, as it's standing there today, just having that as a as a backup plan. Um, so so that was one with the flood issue, and then the other one was a restrictive covenant. So I've often catch people out.

SPEAKER_01 6:43

Yeah, I I mean we've so over the years uh we've had a lot of problems with restricted covenants. Um, if it's very old, it can and it's in it's insurable for very little money to be fair. So it might say, oh, um, you can't sell alcohol on the premises or some nonsense like that from you know 1820 or whatever. Any anything over 50, 60 years, 70 years old probably isn't a problem. You can probably insure it. However, where you've got to be careful is if if the insurers know you've gone and found the beneficiary of the covenant, they won't insure it. So don't go looking for them. Don't go looking for the member of the family from 10, two generations ago who might have died, might not, it's been passed down in generations because they won't insure it. And you can't insure something that hasn't got planning. So it's no point saying so. We were buying a place quite recently, and it had a covenant to say it had to be commercial, couldn't be residential. Bit of a problem with converting it to residential. But that but you know, the insurers cannot insure something you haven't got planning for. So the fact that you go for planning and everyone and it's there's a public notice about it, everything else is almost proof that no one comes, if no one comes forward, you know, they're likely to insure it. But of course, if someone does come forward, you've got a problem. Now, if they do come forward and say, hang on a minute, we've got a covenant on this, you go, okay, how much do you want to lift the covenant? And we've had that situation where you know we might pay them 20, 30, 100 grand, whatever, depending on what it is, to lift the covenant. It's a result for them. And on the other hand, and I've done it the other way around where we've put a covenant on the property because we didn't want it going for if it gets planning or more houses, and people have come to us and go, Oh, there's a covenant, and yeah, there is. Or how much do you want to lift it? Happy days. I mean, that's like Christmas come early, isn't it? Free money. So, you know, so that's so there's both sides of it, really. But uh, with covenants, I would always well, you need to always check before you buy it. Well, the solicitor should be able to put if the solicitor hasn't told you about the covenant, you could probably sue the solicitor, to be honest with you. But if you don't know about but you you need to investigate it prior to prior to exchanging, obviously. Very important. Very, very important.

SPEAKER_00 9:04

And is there could there be a scenario where you buy an auction and it's not declared?

SPEAKER_01 9:10

Well, if it's not declared these days, auction, you can probably go back and sue them or not complete and get your money back, I would say. You know, trading standards, uh, which is the local authority, are quite hot on auctions now.

De-risking Property Investments

SPEAKER_01 9:22

Um, and when we owned auction house, we sold our shares a few years ago now. But I mean, we uh and we've got 40 odd franchises around the country. One or two of them got done for not declaring something. Well, and they didn't know about it, you know, it was genuine, but they still got fined £2,000 or something for not declaring the fact that you know it was information that we didn't pass on we should have known about, or whatever it might be. And that happens to every it happens to every auction house in the country, you know. Uh all the big boys, everyone has a problem with that because you know, these days um the the authorities are quite hot on it, and rightly so, you know. So there is more protection at auctions now than there ever was in the past, I would say. Um yeah.

SPEAKER_00 10:06

That's good. So for anyone who finds themselves in this particular pickle, what can they do now? So would you um have a like pre-app meeting, or um what would you do if you were in the middle?

SPEAKER_01 10:21

Well, I think if you've if you've committed to buying it, um then you need to, you know, just try and unravel it best you can. The the restricted covenant, if it's an old one, you can probably insure it. If it's a quite a new one, then you've probably got to speak to them and say, right, you know, how much do you want for it? Have some sort of deal with them. And on the flooding issue, you know, most most um flooded flood consultants um can get you get round a problem. Most of them can, um, one way or the other. So, you know, I wouldn't, you know, at the end of it, it's not great. And de-risking, we we talk about on these shows quite a lot about de-risking, Michelle. I know you're hot on de-risking and very sensible too. And really, you know, de-risking is is is um sorting these th these things out prior to exchanging. And I couldn't believe this. I spoke at the auction house annual conference last year, which is lovely to go back and speak and everything else there. And um the the uh there's some lawyers before before I was on, there were lawyers speaking, and they said that 40% of people that buy at auction do not look at the legal pack, do not have it looked at. I cannot believe that. That is like Russian roulette, it really is. Talking about de-risking, they don't even look at the legal pack. I mean, you could you could buy, you could exchange contracts, you know, at the auction, hammer comes down or whatever, and then you could find out that a bridger or a bank or whoever won't lend you the money because there's something in that legal pack that says there's a problem, and that's why it's in the auction in the first place. So that's crazy. I can't I couldn't believe that stat. I couldn't believe it.

SPEAKER_00 12:09

Well, it's uh yeah. Scary. It's good if you want to get rid of something in auction, I guess.

SPEAKER_01 12:16

Well, I mean, uh, yeah, we we you know we put a few things in auction time to time because it it to be fair, it's good for cash flow, you know. It's good to keep your money moving

Conclusion and Key Takeaways

SPEAKER_01 12:24

and and having money coming in and so on. But you just I mean, auctions are great to buy at. You just gotta find out why it's in the auction. I know we're we're sort of going off the subject a bit that way.

SPEAKER_00 12:35

Well, it sounds like there's two key people you need here. First of all, the solicitor to check that absolutely check the details, check the contracts, yeah, um, check the title piece. Yeah, yeah, yeah. And then having a planning consultant really looking at the area before we buy.

SPEAKER_01 12:51

Yeah. Making sure that's absolutely Michelle. I think you're spot on there. Um yeah. And um, like I said, if anyone's any got any inner pickle and they want our help, we're always we'll we're we can either put in the right direction or perhaps help ourselves. So yeah.

SPEAKER_00 13:08

Absolutely. If you want a good planning consultant, we know one, don't we?

SPEAKER_01 13:12

Yeah, we we know we know one or two of those, so who we work with. And and and these are people that we work with, you work with, or I work with, so we know they're good. You know, they've been tested out. We're not we're not we wouldn't be giving you an advice on something we never heard of before, whatever recommendation. These are people who who we work with and we know we can trust professionals. Yeah.

SPEAKER_00 13:32

So your key action today is to go out and add these planning checks to every pre-purchase.

SPEAKER_01 13:38

Every everything, everything, definitely.

SPEAKER_00 13:41

De-risking. Great. Okay, that's a wrap for today's episode, and we will see you next time.

SPEAKER_02 13:47

Bye bye.