Indemnity policies explained

If you’re selling a property, you may find the buyer’s solicitors and the mortgage lenders insist on an indemnity policy being in place before the sale can go ahead. If you’re buying a property, your conveyancing solicitor may advise that a policy should be purchased before you proceed. In this article, property specialist Eve Crampsie looks at the different types of indemnity insurance policies and what they do.

A Legal Indemnity Policy protects the buyer when a problem in the title of the property cannot be resolved. Under this policy, the insured party is indemnified by the insurer against any specified costs or losses which may occur in the future. The premium for a legal insurance policy needs to be paid only once and is usually transferred to successors in title.

Indemnity policies basically cover valuable losses of any property and legal costs. Indemnity insurance will cover most title defects as well as some other issues.

Common types of indemnity policies

1) Absence of Easement Indemnity Insurance

The Absence of Easement Indemnity Insurance is an insurance policy used when part of the property or private land abutting the property does not have the necessary legal rights over private land abutting the property so the purchaser cannot enjoy the rights necessary to occupy the land. An example might be where there are no rights of access to get to the property over private land abutting the property, or where services which are private or cross private land serve the property.

For at least 12 months before the policy is put on risk, the right must have been exercised unchallenged. It may also be necessary to obtain a statutory declaration from the seller confirming the position throughout their period of ownership. Once the policy is put on risk, any financial losses which occur during the time that the use of right was being challenged, the policy provides compensation.

2) Adverse Possession Indemnity Insurance

In some cases, the owner of the property may have claimed ownership of some land but they are unable to provide required evidence to Land Registry to prove they are true owners. Here, the owner will only have possessory title. This is called adverse possession. In such situations, it is necessary for anyone purchasing the land to have indemnity insurance. The insurance will cover financial losses suffered by the purchases if someone tries to claim the land.

3) Breach of Covenant Indemnity Insurance (Freehold)

In cases where there is a breach of covenant relating to a freehold title, indemnity insurance can be of great help if the breach is less than 20 years old. The Breach of Covenant Indemnity Insurance can be offered as an alternative so the beneficiary’s consent can be obtained. The cover will have a condition that the breach should at least be 12 months old and that the person obtaining the insurance knows of no attempt by the beneficiary of the covenant to take action.

4) Flying Freehold Indemnity Insurance

When a part of the freehold property overhangs that of a different freehold property, a flying freehold is said to occur. This usually happens when a property is divided into many freeholds.

5) Good Leasehold Title Indemnity Insurance

If the Land Registry doesn’t receive necessary proof of the superior title for a given property, a good leasehold title is usually used to register the property. The Good Leasehold Title Indemnity Insurance will offer compensation if the claim to the title is successfully challenged. For this policy, the cover will have the condition that no challenge should have been made when indemnity policy was taken out.

6) Lack of Planning Permission or Building Regulations Approval Indemnity Insurance

At places where property has been built, altered or extended without proper permissions and approvals, this insurance comes into effect. If the owner loses money because the local authorities took action on breach of regulations, the policy will cover it. This insurance is usually available only for work that was carried out at least 12 months ago.

7) Unknown Easements, Rights and Covenants Indemnity Insurance

This indemnity policy might be used where there are documents which are either known to affect the title to a property or which might affect the title but the documents themselves, or details of their contents, cannot be produced. These documents may also contain covenants or restrictions which are in conflict with the current use of the land. Even though an indemnity policy cannot prevent enforcement of covenants, it can provide financial compensation if any.

COMMON QUESTIONS

What is building regulations indemnity insurance?

You’re most likely to come across indemnity insurance for building regulations during a house sale or purchase.It’s a type of policy that’s sometimes recommended by conveyancing solicitors because work has been done to the property – an extension has been built, for example – but there’s a concern from the local authority over lack of evidence that building regulation consent was granted.

Indemnity insurance for planning permission is available too if you lack the documents to prove planning permission was granted.

Do you need a ‘lack of building regulations approval’ indemnity policy?

While the paperwork is being checked for the house sale, if there’s no completion certificate showing the appropriate building regulations process has been followed, an indemnity insurance policy is often requested by the buyers’ solicitors. The indemnity insurance is designed to protect the new homeowners (and subsequent owners) against legal action if the local authority serves a building regulation enforcement notice. Basically, the local authority can force the owner to alter or remove any work that doesn’t comply with building regulations. The insurance can cover the legal costs or fees associated with this.

In practice, building regulations indemnity insurance is very rarely claimed on, and some people question how useful it really is (it wouldn’t, for example, cover the cost of putting any work right). But many people agree to buy a policy so the house sale can progress.

Depending on the insurer, indemnity policies can be arranged through the post or online. KWW has an account with a selection of insurance companies. The cost or premiums for indemnity policies depend on the value of the property as well as the risk insured. Accordingly, the premiums are charged on a sliding scale, ranging from as little as £20 to as much as £300. KWW charges a fee to negotiate and put on risk an indemnity policy.

You need to be aware the legal indemnity insurance merely offers financial compensation. It does not cure the insured defect. It is also a condition for indemnity policies that their existence not be divulged to a third party.

Help To Buy: Everything you need to know

The Help to Buy scheme was originally introduced in April 2013. Since then, it has helped nearly 170,000 households onto the property ladder. However, as with any such scheme, over time a few issues have started to emerge which buyers need to be aware of. Here, Sarah Trickey, our head of Residential Conveyancing, considers recent research about the Help to Buy scheme, its pros and cons, and what you should look out for.

How Help to Buy works
A Help to Buy equity loan from the Government could help you fund the purchase of your new home. To qualify for the current scheme, you do not need to be a first-time buyer. The home you are buying must be for your own use. It must be a new build and it must cost less than £600,000. You provide at least a 5% deposit, and the Government lends you up to 20% of the property’s value. The balance of the purchase price is then financed with a mortgage from an approved lender. Slightly different rules apply to properties in London.

You must repay the loan when you sell your home, or after 25 years if later. However, unlike a conventional mortgage, the amount you repay is not a fixed amount. Instead, it reflects the ratio of the loan to the value of the property when you first borrowed. So, if your Help to Buy loan was for 20% of the value of your home when you bought it, you must repay 20% of the price you sell it for.

For example, if you are buying a home for £200,000, you must provide at least a £10,000 deposit yourself. The Government will provide up to £40,000 by way of an equity loan, representing 20% of the property’s value, and you fund the balance of £150,000 with a mortgage. If in five years, you sell your home for £250,000, after repaying your mortgage, you are left with £100,000. However, you also have to repay your Help to Buy loan. Instead of repaying the original £40,000, you will have to repay £50,000. This represents 20% of the value of the property when you sell.

The loan is interest-free for the first five years, although there is a monthly management fee of £1. After five years, you pay an additional fee as interest of 1.75%, which will then rise annually by the Retail Price Index plus one per cent. 

Although the principle behind the scheme is very simple, the detail and processes involved can appear complicated. For example, you will need formal confirmation of your eligibility to proceed. Choosing a solicitor like KWW Solicitors which has lots of experience in these types of equity loan will help you avoid delays and potential pitfalls. 

Pros and cons
Almost £9 billion has been advanced under Help to Buy, and the Government considers it a great success. There are certainly several benefits to the scheme:

  • If you only have limited savings and a relatively small deposit, Help to Buy can make it easier to get a mortgage and to buy your own home
  • As you will be borrowing less of the property’s value from your mortgage lender, you may also be able to get a more competitive deal
  • The initial interest-free period can ease financial pressure in the early years of home ownership, when you most need help.

However, the scheme has its critics, and it is important to consider the possible disadvantages:

  • Help to Buy applies only to selected new build homes, which tend to sell for a premium over comparable pre-owned homes. In addition, recent research suggests first time buyers using Help to Buy pay on average 8% more than those buying new homes independently.
  • The amount you must repay depends on the value of your home when you come to sell. This could be good news if property prices go down but if prices go up then you may have to repay significantly more than you borrowed. This could mean having less cash to fund your next purchase.
  • After the initial interest-free period has expired, the cost of borrowing will increase. You may end up paying more than you would under a conventional mortgage. While remortgaging remains an option, you may find fewer lenders willing to provide finance if you are buying with a Help to Buy loan.

You should also be aware that the current Help to Buy scheme ends in March 2021. A replacement scheme will be limited to first time buyers and the properties they can buy will then be subject to regional caps.

Getting the right advice
Help to Buy is not right for everyone, and it is important you consider how suitable the scheme, and any particular property, is for you. Speak to your solicitor early on, as Help to Buy involves some additional steps in the conveyancing process and they can advise you on any risks.