Noel Ahern (Dublin North West, Fianna Fail)

While it is generally accepted that stage payments may be warranted in the case of one-off housing, I do not consider that this is likely to be the case in the context of speculatively built estate housing. Stage payments typically refer to the practice of requiring the purchaser in a new housing development to make payments to the builder at a number of set intervals or stages in line with progress of the building. While the practice of purchasing new houses in housing estates by means of stage payments does not apply in most parts of the country, it is recognised as being prevalent in Cork and some other parts of the south and west. The making of agreed phased payments under a standard building contract is a common arrangement for the development of one-off houses in rural areas generally. Substantial house extension or renovation contracts usually also involve such arrangements.

I understand that in the main, the use of stage payments in Ireland developed during the 1970s among a number of Irish builders who had returned from the UK. These builders operated at a small scale and used stage payments to gain access to capital to enable them to construct housing, as sufficient financing was not always readily available from the lending institutions. I understand that the absence of stage payments in Dublin and other areas has been attributed, at least in part, to the consequences of a court case involving stage payments following which Dublin solicitors opposed the practice. However, I believe that stage payment arrangements were not the norm in Dublin and adjacent areas before then.

The IHBA home purchase protection pledge code of practice contains provisions relating to stage payments. This is a purely voluntary professional code and does have any statutory effect or recognition at present. However, I understand that approximately 80% of builders subscribe to it and it includes a complaints procedure in respect of members who breach the code. It states that the value of a stage payment, when taken together with the cumulative value of payments made to that date, should not exceed the value of the site and the work completed at that date. There are also bonding systems in operation under which a certain amount of cover may be provided in cases where the builder is unable to complete the work and stage payments cannot be recovered.

In December 2001, the High Court ruled in a case taken by the Office of Director of Consumer Affairs under the European Communities (Unfair Terms in Consumer Contracts) Regulations 1995, that stage payments in house building contracts, which exceed the percentages stipulated in the IHBA code of practice, or which exceed the extent and value of works carried out at the date specified for the payment in question, shall not apply. However, it is important to note that the court made this ruling without prejudice to the propriety or impropriety of stage payments per se.

Following the debate on a Private Members' Bill in this House in 2004, I had a detailed examination of the issues carried out in the Department. Arising from this, a comprehensive paper was prepared for the purpose of consultation with relevant interests but its circulation has been deferred to allow engagement with the construction industry regarding possible voluntary phasing out. This process has taken longer than I would have liked but, as I indicated at the beginning of this speech, it promises to prove successful. It is clear from the examination carried out that arguments can be put forward both for and against the system of stage payments.

A claim made in favour of the system is that it tends to moderate house prices by virtue of reducing the builders' financing overheads during the course of construction. It has also been argued by the construction sector that stage payments can protect house buyers from gazumping, as contracts must be signed at an early stage for stage payments to commence, thus ensuring the house price is fixed and contractually binding.

A key argument against the practice of stage payments is that, notwithstanding the existence of bonding arrangements, it results in a large element of risk being carried by the purchaser rather than by the builder during development. As such, it is the purchaser's funds that are at risk if, for any reason, a building venture failed. While it is understood cases such as these are few and far between, if it does happen it is a serious problem for a buyer. Furthermore, it is claimed that stage payments can create a significant additional financial burden for many home buyers, particularly first-time buyers, those with restricted budgets, and those paying for rented accommodation while also making stage payments.

Many developers have ways to minimise financing costs not available to home buyers, such as extended credit facilities, more advantageous borrowing terms, time lag on payment of VAT and instalment payments for land purchase. Thus, overall cost savings from stage payments that might potentially be reflected in house prices are likely to be less than the additional cost falling on home buyers.

The pros and cons associated with stage payments and the balance of advantage or disadvantage is likely to vary, depending on the circumstances. While it is generally accepted that stage payments may be warranted in the case of one-off housing, this is not likely to be the case in the context of estate housing. It is evident that the mainstream new housing market operates extremely effectively in most parts of the country without a stage payments system.

While the extent of possible additional costs to purchasers arising from stage payments may be debatable, it would appear that the practice is, on balance, likely to have a broadly negative overall impact on purchasers in housing estates. Moreover, a stage payment arrangement is, on the whole, unlikely to provide the most effective form of contractual mechanism from the customer perspective outside of the one-off building contract. Indeed, it seems at odds with the emphasis in public procurement on seeking to achieve the most appropriate allocation of risk between developer and client.

A good deal of discussion and correspondence has taken place over the past six months or more between my officials and members of the CIF in Cork. We emphasised that the balance of opinion among public representatives and the general public appears to be against the practice of stage payments in housing estates. We made clear our strong preference for an agreed approach and sought a definite commitment on the part of the construction industry to a voluntary phasing out of the practice in housing estates.

I recently wrote to Senator Coghlan to keep him informed of developments. The fact that the CIF has now indicated its willingness to enter immediate discussions for early phasing out is a positive outcome of these efforts, even if it has taken longer than I would have wished.

In the course of our engagement with the construction industry on this matter, we made clear that the Government will keep open the possibility of legislation to deal with this issue. Any legislative measures, for example as a backup to voluntary agreement, would fall to be considered in the context of conveyancing practice and house purchase contracts. This area of law comes within the responsibility of the Department of Justice, Equality and Law Reform rather than my Department.

The Minister for Justice, Equality and Law Reform recently published the Land and Conveyancing Law Reform Bill 2006. The Bill is largely based on a draft Bill published last year and a Law Reform Commission report on the reform and modernisation of land law and conveyancing law. The Law Reform Commission proposed inclusion of the regulation of stage payments in the context of a provision for regulating the terms of building contracts. The Land and Conveyancing Law Reform Bill does not contain a specific reference to stage payments, but it does have a general power for the Minister for Justice, Equality and Law Reform to make regulations relating to contracts and conveyances for the sale of land, including buildings.

I note Senator Coghlan spoke favourably about the Land and Conveyancing Law Reform Bill on Second Stage. I am surprised that he or indeed any of his colleagues did not, as far as I am aware, mention stage payments in the course of the debate. Perhaps my letter did not reach the Senator before that debate.