August 6, 2015

Your guide to the indemnity policy – Do you really need one?

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If you are in the midst of buying or selling a property and have been told you need an indemnity policy, then your legal advisor should have explained what one is and why it is necessary. However, sometimes explanations are lost in translation and/or can become overly confusing within the context of the whole transaction. And now, you find yourself at the mercy of the internet, fervently looking through page after page for some clarity. Well look no further, as today’s post is aimed at providing you with a brief overview on what indemnity policies are, when they should be used, and who should pay for them – without all the legal jargon.

An indemnity policy is a form of insurance that can be used to “fix” legal issues when selling a property. The term fix, is used in its loosest form here. Indemnity policies can be used for missing legal documents, they can be used for breaches of restrictive covenants (promises that run with the land) and they can be used for a lack of planning and building documents amongst many other things. They are obtained for a one off fee, and can cost anything from £15 up into the hundreds; but when do they actually pay out? This depends on what the policy was taken for and is better discussed within different contexts.

Sometimes legal documents go missing, they shouldn’t, but they do. If your solicitor has told you that you need an indemnity policy because there is a missing Conveyance from 1952 which contains unknown restrictive covenants, do you really need to pay for the policy? The short answer is yes. A conveyance is a legal document and restrictive covenants are promises to do or not to do something. Although the document is missing, all this simply means is that a copy has not been registered at the Land Registry. There could be a party out there, somewhere, with a copy of the Conveyance, ready to pounce the minute a restrictive covenant is breached. Without seeing the document first, the new buyers will have no idea what could constitute as a breach. The chances of the buyers actually breaching a covenant, and then the party with the benefit coming along to enforce the breach are slim and as such it is unlikely they will ever claim on the policy. However the policy would pay out, if something along the following lines happened: Mr and Mrs Smith decided to build an extension at the back of their property. Mr Jones comes along with a copy of the Conveyance and shows them that the extension has been built in breach of the Conveyance as his permission should have been sought before the work was carried out.  Mr Jones can either tell the Smiths to tear down the extension thereby restoring the property to how it originally was, or provide retrospective consent. Both of which can be extremely cost. In this instance Mr and Mrs Smith can rely on the policy to pay out.  Although breach of covenants is not the only risk that runs with missing documents, it is normally the most significant, but do be aware there are other potential risks that indemnity policies can cover in relation to missing documents.

In another, more common, scenario where an indemnity policy would be needed is if Mr and Mrs Brown are selling their property and they have built an extension without obtaining proper documentation. Although they do not have any covenants affecting their property, and planning permission was obtained, Mr Brown thought it would be cheaper to use his mate Joe from down the road to do the work. And although Joe is good at what he does, clearly he’s not good enough because he did not obtain a Building Regulation Completion Certificate from the council. The council issue such certificates to show that work has been carried out to proper health and safety standards. Although local councils are time barred to bring enforcement action after 12 months, they can apply to the court for an injunction after this period. As such, under the Conveyancing Protocol (a guide which solicitors and conveyancers should follow), the buyers solicitor will normally ask for Building Regulation Completion Certificate for any work carried out in the last 10 years. In the absence of such a certificate, the norm is to opt for an indemnity policy. However it is extremely important to know that the policy will ONLY pay out if enforcement action is taken by the council – and not for shoddy workman ship. In most cases, the policies come with prerequisites which need to be satisfied  – one of these being that the work was carried out over 12 months ago!

So if you are buying and have been offered an indemnity policy for a missing completion certificate, you will need to consider the possibility that the work may not have been carried out properly and the potential costs in rectifying it if problems arise in the future.

The other question which gets thrown around a lot when discussing indemnity policies is who should pay. The seller is normally firm in his belief that as the buyer is benefiting it should be them who foots the bill; whereas the buyer will claim it is the seller’s job to provide adequate/complete documentation. It is normally the seller who should pay for the policy, but in some cases where the buyer wants the property badly enough and the seller is refusing to pay, the buyer will take it upon themselves just to push through to an exchange and completion.

Many argue that indemnity policies are unnecessary and simply delay and confuse the conveyancing process. However, if you have a lender it is nearly always essential to obtain a policy for defects in title and missing documents. In many cases the policy will rarely be used, but how often do you make a claim on your car insurance? And would you really want to? It is always better to be safe than sorry and indemnity policies are a protective measure. Just remember to keep a copy of the policy in a safe place for when you come back round to selling the house!

For more assistance with conveyancing matters and to receive expert legal advice in property laws contact us on 01753 486 777