When purchasing, selling, leasing or mortgaging either commercial or residential property, you may come across certain issues during your transaction which cause you concern, or worse, might mean that a lender will refuse to lend against the property or, you will have to pull out. You may have heard the suggestion that “insurance” will cover off certain kinds of risk that look bad on ‘paper’ but, in practical terms, are unlikely to be a problem. This is known as “title indemnity” insurance and there are a plethora of providers in the market that will cover a range of issues, such as:
- a defect in title such as lost documents and deeds;
- a pre-existing breach of a restrictive covenant or a note of covenants that are unknown;
- the lack of necessary rights (such as access or service media);
- a potential liability for chancel repairs;
- the absence of planning permission or other consents for works previously carried out at the property; or
- the absence of searches relating to the property (i.e. where contracts are exchanged quickly, or the matter is expedited).
You should be aware that insurance does not fix the issue or defect, it simply insures against any diminution in value of the property, should the risk come to fruition, and so they should not be treated as a ‘one size fits all’ solution to all legal problems. Policies tend to cover the following:
- loss in market value of the property;
- professional fees;
- cost of demolition and reinstatement;
- cost of providing alternative access and or services (e.g. if the insurance covers lack of rights);
- costs and damages, if awarded against the insured; and
- costs for out of court settlements and legal costs.
The policies mainly cover financial loss, and so should the defect be one that affects your use and enjoyment of the property, bear in mind that the policy will not cover this. For instance, consider someone claims a right of way over your property. Whilst you may have insurance to fight the claim or cover the loss in value to your property, if the third party is successful, loss in value alone is not enough to compensate you for the practical issue, that being, that a third party now has that right over the property that could interfere with your use or plans for the future.
It is likely that the premium for the policy will be a single, one-off payment, which will cover the owner, any lender, and successors in title. The level of cover is calculated on the value of the property at the time of inception of the policy and so it is worth bearing in mind that, if the property value increases, you would be wise to increase your level of cover as well.
When establishing a defect, it is important not to do too much digging. It may seem sensible and helpful to contact various parties to gain information about the defect (e.g. the Local Authority regarding lack of planning or neighbours regarding restrictive covenants) however, in fact, doing so can either prejudice your ability to obtain insurance or, invalidate any existing cover. Insurers do not want you to effectively put those parties with the potential benefit of the claim, on notice.
Another important point to note is that you must not disclose the existence of the policy to anyone, without the insurers’ consent, as this can make the policy void. It is, therefore, best to stay quiet and keep the existence of the policy under your hat and, should you be approached by anyone suggesting a breach or claim, consult your insurers immediately before doing anything else.
Aimee Ellery. Partner, Commercial Property department
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