If your house sale is being held up by problems with the planning permission or other legal issues, title indemnity insurance may allow the transaction to complete.
When you’re buying a house and applying for a mortgage, the conveyancing process can sometimes throw up all sorts of surprises.
Some of these might seem like insignificant issues to both the buyer and the seller, but they can throw a real spanner in the works when it comes to persuading the mortgage lender to release the funds.
Indemnity insurance – sometimes called legal indemnity insurance, or title indemnity insurance – can come to the rescue in such cases, satisfying the lender (and the buyer) that it’s ok to proceed.
Indemnity insurance is used during conveyancing transactions to cover some sort of legal defect with the property which can’t be resolved swiftly, or at all.
As an alternative to rectifying the defect, an indemnity insurance policy can be taken out, particularly when the buyer is otherwise satisfied with the property and simply wants to make sure their mortgage goes through smoothly.
The Council of Mortgage Lenders’ (CML) handbook for conveyancers says: “You must effect an indemnity insurance policy whenever the Lenders' Handbook identifies that this is an acceptable or required course to us to ensure that the property has a good and marketable title at completion.”
The issues covered by indemnity insurance usually have a very low risk of causing any actual loss – but if they did cause a loss, it would be significant.
Yet buyers should always keep in mind that the indemnity policy doesn’t actually remedy the defect – it simply provides financial compensation in the event of the defect causing a loss.
Legal indemnity insurance covers the buyer and the mortgage lender in the event of any loss of value on the property as a result of the defect.
Unlike other types of insurance which have an annual premium, indemnity insurance is paid as a one-off, is transferred to successors in title and lasts for the life of the property.
Yet it’s usually the seller who pays for the policy.
Most policies cost in the region of a few hundred pounds, so most sellers will pay this rather than see a sale fall through.
However, if the seller refuses to pay, the buyer may need to negotiate with them over who covers the cost, or else walk away from the sale.
Legal indemnity insurance could extend to a whole range of defects, with planning permission and building regulation issues being the most common.
When you’re buying a property, your conveyancer has a responsibility to make sure all relevant planning permission and building regulations have been obtained.
If a property has been built, altered or extended without building regulations or planning permission approval, then the local authority could take action to ask for it to be reversed or remedied.
However, in most cases there's a four-year limit on the local authority issuing an enforcement notice, so if the work was carried out before this the risk of any action is remote.
Because of the low risk involved, indemnity insurance is often more appropriate than the seller trying to retrospectively satisfy planning conditions in the case of things like loft conversions and extensions.
However, indemnity insurance is no guarantee that the work carried out is safe or satisfactory, so a prudent buyer should still consider arranging surveys and engineer reports for their own peace of mind.
Restrictive covenants are provisions written in the deeds of a property which limit its use in some way. On residential properties that could be anything from an agreement not to erect any outbuildings, to not keeping chickens in the garden.
If you’re looking to buy a house where a covenant has already been broken – for instance an extension has been built in a position where it’s forbidden – a neighbour or other interested party could, in theory, insist that it’s removed.
However, if the breach has been in existence for some time, indemnity insurance may be a solution to allow a house sale to go through.
There may be conditions to the insurance, such as no dispute being currently ongoing, or the breach having been committed a certain time ago.
During the conveyancing process it might transpire that the property is accessed by land where the property hasn’t been granted a right of easement – the right to get to the property this way.
Indemnity insurance for an absence of easement will cover the cost of establishing easement, or the loss of value in the event access ever becomes an issue due to this lack of permission.
Again, the chances of this happening are usually remote if the property has had access that way for many years, or if the owner of the access land is unknown.
Sometimes during the searches, the conveyancer will find that the property is liable for chancel repair. This means that the owner of the property could be collared for repair costs to their local church and there are horror stories of this running to thousands of pounds.
In practice, however, it’s rarely enforced, so an indemnity insurance policy can offer a cost-effective solution if it’s a sticking point during a home sale.
Sometimes, where a gifted deposit is required, a conveyancer will ask for indemnity insurance.
This is to provide cover in the event of the person making the gift being declared bankrupt.
From the point of them being declared bankrupt, creditors could, in theory, try to claim back the gift from the homeowner by declaring it as an interest in the property, potentially forcing the homeowner to sell.
Indemnity insurance for insolvency provides cover for this eventuality.
All indemnity policies contain a clause that the insurance will be invalidated if the existence of the problem is revealed to third parties.
In practice, this usually makes it impossible to remedy the reason for taking the insurance without invalidating it.
For instance, if you had indemnity insurance for an extension built without planning permission and took out indemnity insurance, if you then sought to obtain retrospective planning permission you would invalidate the insurance, even if planning permission were denied.
This means that it’s a good idea to discuss your future plans for the property with your conveyancer.
If, in the above case, you planned to carry out work to the property in future, you could invalidate the indemnity policy by inviting the planning department to inspect your property for the new work.
This means it may not be the right solution for you and you might be better off asking the seller to complete the time-consuming process of obtaining planning permission retrospectively – or simply walking away from the purchase.