Indemnity Policies

Use of Indemnity Policies in Property Transactions

Posted in Residential Property.

Indemnity policies are widely used in both residential and commercial property transactions. They are an insurance policy put in place to protect the owner of a property in the event of any loss of value on the property, usually resulting from a title defect (e.g. breach of covenant) or legal issue (e.g. lack of planning consent).

There will always be a very valid academic argument that it is better to address and rectify a title defect as opposed to turn a blind-eye to it and obtain an indemnity policy. On the surface, it can be argued that adequately resolving a title defect so it disappears completely will result in the property free from any issues and all future owners of the property having a ‘clean’ title.

If a title defect can be resolved simply and efficiently then it is hard to argue there is any reason to consider the use of an indemnity policy.

However, title defects are more common than anyone other than a property solicitor would imagine. The use of indemnity policies is an extremely efficient way to allow property buyers, sellers and lenders to move through the conveyancing process with efficiency. Many title defects are of little concern to the average property owner and, in practice, will lay dormant forever with little chance of having any detrimental effect on the use or value of the property.

For example, restrictive covenants effect many properties stipulating that something should not be done on the property without a neighboring land owner’s consent. This may be not to use the property for business use, not to keep a caravan on the property or not to add any additions to the building on the property. Such restrictions were likely to be imposed between 20 and 200 years ago and may have been imposed on a much larger parcel of land from which the current property has been sold out of. The issue with restrictive covenants is that such restrictions are only removed from the property in very specific circumstances therefore often remain on the property title whether or not they continue to be enforceable. The legal process on determining whether a restrictive covenant remains to be enforceable is complex, often involves multiple property owners and becomes expensive. If you are buying or selling a home, such a process is the last thing you would want to undertake.

If the property title has a restriction not to add any additions to the building but there was an extension at the property which was built over 10 years ago (and had all the necessary planning permissions etc.), it is pretty safe to assume you would be happy proceed with buying the house and you would not have any issues. And chances very much are you would. However, in theory, there may be a land owner nearby who could attempt to take action to have the extension knocked down as it was in breach of the restrictive covenant. While this is extremely unlikely, it may be possible. It is much simpler and efficient to put an indemnity policy in place to cover this unlikely event rather than ignore it completely and hope for the best or undertake thorough research to consider if there was a neighbor who could enforce the restriction. To see what would need to be done to consider if the restrictive covenant is enforceable

Indemnity policies are more often used to protect the interests of mortgage lenders. In the above restrictive covenant example, many home buyers may be happy to ignore the risk completely and hope for the best. A mortgage lender will never be happy to take such a risk. This is one of the main reasons indemnity policies are very widely used in both residential and commercial property transactions. A lender has a lot at stake and will generally not accept any risks.

Indemnity policies usually need to be obtained by a solicitor and can be obtained online instantly. If you have plenty of time and enough money, it may be a more complete approach to consider if a title defect can be resolved ‘properly’. If you are buying or selling a property, want the transaction to be concluded efficiently and consider the risk of enforcement action to be acceptable, a £100.00 (give or take) indemnity policy may be a preferred option.

It must be noted, continuing with the above restrictive covenant example, that an indemnity policy is merely an insurance policy which will pay a monetary amount to cover a loss in value of the property should enforcement action be taken (they also often cover legal expenses). An indemnity policy will not stop enforcement action being taken and an order being made for the extension to be taken down.