In this guide we look at what Security for Expenses under the Party Wall etc Act 1996 (the “Party Wall Act“) are and how they work.

When does security for expenses apply?

The Party Wall Act provides for a clear mechanism to ensure that a neighbour (adjoining owner) can obtain security that any relevant expenses will be paid by the party carrying out the works. Although this can apply in the case of any works under the Party Wall Act, they are most relevant when there is a particular risk to the neighbour’s property as a result of the work or if there is a particular credit risk or issue with the owner. For example, Security for Expenses may apply in the following circumstances:

  • Basement excavations;
  • Underpinning work;
  • Work leaving the party wall exposed;
  • demolishing and rebuilding a Party Wall or Party Wall Fence; or
  • work undertaken by a developer, particularly through a SPV or where they are based abroad.

What is the legal basis for security for expenses?

Security for Expenses is covered by section 12 of the Party Wall Act which states that “an adjoining owner may serve a notice requiring the building owner before he begins work ….. to give such security as may be agreed between the owners or in the event of dispute determined [by the surveyor(s)]“.

It is worth noting that it is the adjoining owner that must serve the notice and it is not for the surveyor(s) to recommend or advise on Security for Expenses, although they can do so. In fact RICS makes clear that the surveyor(s) are not under an obligation to recommend Security for Expenses even when it may be in the best interest of the adjoining owner to request this. Therefore, it is important that the adjoining owner is aware of their rights in this regard.

How does escrow fit with security for expenses?

Although it is possible to have other forms of Security for Expenses, by far the most common arrangement is to put in place a Party Wall Escrow arrangement. This is the simplest approach and offers the best protection to the adjoining owner.

Normally the building owner will deposit the agreed amount of Security with the Escrow Agent, who will then hold the sums until the work is completed. Assuming everything goes to plan, the Escrow Agent will return the Security to the building owner upon the satisfactory completion of the works.

However, if there are any issues with the works or the works are not completed in a timely manner, then the Security can be paid to the adjoining owner to cover their relevant expenses. The amount of the security to be paid to the adjoining owner can either be agreed between the parties or determined by the surveyor(s).

Who can act as escrow agent?

The provision of Escrow Services falls under the Payment Services Regulations 2017 and therefore, in our view, only an entity that is authorised to undertake the relevant activities under the Payment Services Regulations 2017 or is otherwise exempt can act as an Escrow Agent. Therefore, to ensure your funds are properly protected, it is important to ensure they are held with a regulated Escrow Agent.

Can a law firm act as the escrow agent?

In almost all cases, a law firm should not hold the funds in their client account as it would be in breach of the rules set by the Solicitors Regulation Authority (SRA). In December 2014 (updated in August 2018), the SRA issued a warning notice to law firms stating that they should not use a client account unless there is a proper connection between the holding of funds and the underlying legal work. This is very unlikely in a Party Wall Act Escrow arrangement.

Can the surveyor firm act as the escrow agent?

As set out above, the provision of Escrow Services falls under the Payment Services Regulations 2017 and therefore, unless the Surveyor firm is properly regulated, we do not believe they are authorised to provide the Escrow Services or provide the appropriate protections.

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