Manchester Solicitors

Indemnity Policies – What are they?

This is a very useful form of legal Insurance Policy taken out to deal with a technical legal (often historical) risk associated with the property being sold. In some instances, these policies can be taken out if there is an issue which would otherwise take many months to resolve, in the interests of avoiding the transaction stalling or aborting (particularly if there is a chain), and in some instances there can be historical possible rights, such as rights of way or other obscure legal risks where it is virtually impossible to remove the small risk legally, as it may not even be possible to identify who has the benefit of such rights now.

The Insurance Policy is intended to protect the owner of the property, and so if the seller pays for it, the buyer and their successors can still benefit. These policies attract a single premium which is usually payable by the Seller. If the risk is regarded as small the premium can be as low as £150. The value of the policy will usually reflect the price of the property.

A common issue with such policies is that the buyer’s mortgage lender will need to agree that such a policy can be taken out instead of seeking to resolve the matter by legal process, and different lenders have different attitudes to such policies. They are commonly used though.

Do I need a local search?

If you are buying with the aid of a mortgage, the lender will require one to be carried out. In any event we always recommend one. The local search is a set of standard enquires raised with the relevant Local Authority which keeps records relating to the locality and the property and the search reveals things like responsibility for road repairs and the planning history of the property. Please note however that the search does not reveal everything about the property or neighbourhood.

What if I don’t have a 10% deposit when I exchange?

It is not unusual for Sellers to agree to contracts being exchanged with less than 10%, but normally an explanation will need to be provided as to why the full 10% is not available. Where you are selling and buying simultaneously, the deposit being paid by the purchaser of your existing property, whether the full 10% or less, can very often be utilised either as part of or all of the deposit on your purchase transaction, but this must be acceptable up the chain.

Do I need to take out building insurance?

The lender will require buildings insurance to be taken out. The survey report will give a figure, which must be covered by the insurance, for the cost of rebuilding the property if it were destroyed. The lender can arrange insurance for you, or you can arrange your own cover. If you already have buildings insurance, you can stay with your existing policy if it is extended, if necessary, to cover the suggested rebuild cost in the survey report.

Arranging insurance for a flat needs particular care. Flats are usually owned under a long lease, and if the Landlord is responsible of insuring the building, that responsibility may not extend to the interior walls, floors and ceiling of the flat, so contents insurance will have to be appropriately extended.

What happens if I own a flat but the freeholder has disappeared ?

This is a difficult situation since many lenders require a situation such as this to be resolved before they will allow drawdown of funds. There is a procedure available to secure the freehold interest but this is not quick. Consequently, as a seller considering selling a flat, if you are aware that the freeholder has disappeared, it is important to start the process to resolve this issue well in advance of finding a buyer. In legal terms, the 1993 Leasehold Reform Housing and Urban Development Act now allow applications to be made to the County Court for what is known as a Vesting Order.

In order to be successful in obtaining a vesting order a leaseholder or a group of leaseholders need to make an application to the County Court and paying a Court fee of around £150. In order to grant a vesting order the County Court must be satisfied that endeavours to trace the landlord have been comprehensive. Examples of evidence such as the following must be produced :

• Witness statements to confirm that a visit to the Absentee Landlord’s last known address has not provided a forwarding address, or;
• Land Registry evidence ( Official Copies ) of the Absentee Landlord’s last known address in order to prove that he or she no longer owns the last known address property and has moved on to address unknown, or:

The court will not set a date for a hearing unless satisfied that all reasonable efforts to trace the Absentee Freeholder have been made. This is not the end of the strory though as a reasonable fee to buy the freehold will then need to set by the leasehold Valutaion Tribunal, to then be sanctioned by the county court, and the amount payable will then need to be paid into court, to be withdrawn by the freeholder if he/she/they reappear.

What problems can arise on old leases which might require a deed of variation ?

The content of residential leases has changed considerably over the last few decades, and it is worth remembering that a lease interest bought now can often involve buying a lease prepared decades ago. Consequently, many flat leases, particularly in older blocks of flats have leases which do not contain adequate Landlord and/ or tenant rights and obligations to make the leases suitable as security for mortgages.

Amongst typical issues with such leases which are unacceptable to lenders are :-

• An unexpired lease term remaining which is too short. You will need to check with each individual lender on their unexpired term requirements but as a rule of thumb 80 years or over will be acceptable.

• If there is a clause in the lease allowing the freeholder to forfeit the lease on the insolvency of the tenant.

• If there are  restrictions on transferring or mortgaging the lease.

• If there are inadequate legal rights of access, services, support shelter and protection

• If there are inadequate arrangements for buildings insurance, maintenance and repair of the structure, foundations, main walls, roof common parts common services and grounds.

• If there are adequate responsibilities on either the landlord or the tenant to insure, maintain and repair the common services of the block of flats.

If any of the above are missing from a residential lease then it is considered to be ‘defective’ and the flat owner may experience difficulty in selling the flat and/or may have to purchase expensive indemnity insurance to cover for the lease defects in order to get the sale completed.

Another problem which can arise is created if the seller, or a previous owner has made alterations to the flat in breach of the lease, even if the freeholder is unaware of such alterations or has taken no action. The difficulty in selling the property may be caused because the old lease plan may no longer reflect the property layout. A retrospective licence for alterations, which is a form of deed of variation may be required, and this generally involves delay and extra cost, not least because the freeholder will appoint solicitors and the seller will have to pay their charges also. As indemnity insurance may be available, but only if the freeholder is unaware of the breach of lease, it is advisable to consult a lawyer before approaching the freeholder for a retrospective Licence for Alterations .