Why has my solicitor asked me to pay for an Indemnity policy, and what is it?

Residential property lawyers are, amongst other things, tasked with considering the legal ownership (known as ‘title’) of a property. to ensure it is free from historical, current and future defects. There is a long list of possible property title problems, some of which we outline below.

An indemnity policy is an insurance. It does not fix the underlying legal issues associated with a property sale transaction. Nonetheless, an indemnity policy is a cost-effective means of keeping a transaction on track. The alternative might be time-consuming remedial action, for example obtaining retrospective planning permissions or building regulation consent. In this instance an indemnity policy may be used to protect a potential buyer from loss caused by ‘title defects’.

What might be classed as a title defect?

This list is not exhaustive but gives an overview of some of the most common defects.

1. Restrictive covenants

These prevent a homeowner from doing something which might otherwise impact on their neighbours. Examples might include not being allowed to use the property for business purposes; not erecting a fence over a certain height or of a certain material; or not causing nuisance or disturbance. If a restrictive covenant has been breached, your property is considered to have defective title.

2. Lack of building regulations and/or planning permission

This is altering your property without obtaining planning and/or building consent. This is relevant to all properties, but certain properties may require more consent, for example if they are a listed building.

3. Easements (legal rights over property)

Sometimes, there may be no access to your property except through a neighbour’s land; this necessitates a right of access. Other easements relate to the right to access drainage, or to enter neighbouring land to repair this, or any other system connected to your property.

4. Adverse possession

This relates to land which, although not registered under the property, is enjoyed as being a part of it.

Property title defects can potentially result in loss of property value; legal disputes which can lead to substantial legal fees to defend a claim; loss of enjoyment of the property; additional costs concerned with demolishing erected structures and more.

Non-title defective risks

Other indemnity policies can refer to matters not related to legal defects of the property, but to protect buyers, and mortgage lenders. Often, if you are buying with a mortgage, your property lawyer will act for both you and your mortgage lender in the transaction. They will have a duty to ensure that the mortgage lender’s money will be secure if by any chance the property is repossessed in the future.

If, for example, you are being gifted funds to support your purchase, lenders may request indemnity policies in relation to solvency to protect their security.

Conversely, if you are selling at an undervalue, the buyer’s lawyer may insist on the same indemnity policy to protect the buyer and the mortgage lender.

Should I pay for an indemnity policy?

If there are property title defects, there are essentially two options.

• Investigate title for a legally-sound fix. This could include instructing surveyors, architects, the local council, or other professional bodies depending on the title defect. Your property lawyer may also charge for their increased work associated with this.
• Purchase an indemnity policy for the defect. Although an indemnity policy will not fix the issue, any loss associated should be covered by the policy.

Traditionally, indemnity policies are paid for by the seller as the legal owner of the property. It is unlikely that the buyer will agree to contribute to the expense.

Does an indemnity policy expire?

As the seller, you will not be expected to pay anything other than the one-off payment premium when placing the policy. The policy is unlikely to expire, and is intended to run with the property indefinitely, unless otherwise stated. Your lawyer will be able to advise you further on this.

Indemnity policies and legal fees

It should be noted that indemnity policies are not costs associated with your conveyancing lawyer’s fees and are unlikely to be considered when being provided with a quote for a sale. This is because, the requirement for an indemnity policy is often not known until quite late in the conveyancing process once the property title has been thoroughly investigated. The fees are paid to an insurer, and are third party costs.

Taking action and being upfront early

In another recent blog we talked about getting your paperwork ready before selling your home. Doing this preparation before putting your home on the market may help to flag up any title defects. If you don’t think it will be easy or practical to fix them in a sensible timescale before marketing your property, you may wish to consider an indemnity policy. The residential property specialists in any of our offices will be happy to discuss your individual position with you when you instruct us on your property sale.

How To Contact Us:

To contact a member of our team, you can fill in our online enquiry form, email info@fraserdawbarns.com, or call your nearest office below. If you’d like to speak to a member of our team at one of our offices across Norfolk and Cambridgeshire, visit our offices page.

Wisbech: 01945 461456

March: 01354 602880

King’s Lynn: 01553 666600

Ely: 01353 383483

Downham Market: 01366 383171

This article aims to supply general information, but it is not intended to constitute advice. Every effort is made to ensure that the law referred to is correct at the date of publication and to avoid any statement which may mislead. However, no duty of care is assumed to any person and no liability is accepted for any omission or inaccuracy. Always seek advice specific to your own circumstances. Fraser Dawbarns LLP is always happy to provide such advice.