26 September 2017

Asset Management Q&A

Q: I am buying a property which has an existing defective title insurance policy. Please can you explain a bit more about what this means?

A: Title defects often come to light during conveyancing transactions. Some of the most common defects include unknown restrictive covenants, ransom strips, the absence of easements, partially implemented or missing planning permissions and possessory title.

Obtaining defective title indemnity insurance can prove a cost effective and efficient way of dealing with these issues and, where a lender is involved, can be the key to unlocking the loan. Defective title insurance has become widely accepted and available throughout the property industry, with many insurance providers offering tailored policies to cover a variety of commercial risks.

When reviewing a defective title policy, it is worth considering the following key points:

  • Don’t take it at face value: Just because an existing policy appears to be in force, it does not mean it is. Always check with the relevant insurer that the terms have not been invalidated.  It is also important to remember not to approach any third parties, who could potentially bring an action in respect of the title defect. Alerting a third party who, for example, might have the benefit of a restrictive covenant, to their ability to bring a potential claim could invalidate the policy.
  • Successors in title: If an existing policy does not benefit successors in title, then it will be of no value to a potential purchaser and revised terms, or an entirely new policy, may need to be sought. Most policies will be for the benefit of the named party plus successors in title, tenants and mortgagees but always double-check the extent of the third parties covered.
  • Use: If the property is to be redeveloped, the policy will need to cover both the current and future use. It can also be beneficial to ensure that the policy does not relate solely to one particular planning permission, in case the terms of a proposed scheme need to be varied.
  • Who pays? An indemnity policy is usually subject to a one-off premium, which is payable at inception on a sliding scale, based on the value of the property and the nature of the risk. The policy limit will vary depending on whether it is appropriate to insure for the value of the property, or for any other financial implications that may arise from the risk in question, such as legal fees, loss of market value or compensation payable to a third party.  A seller will usually be asked to bear the cost of the premium. However, a seller may feel that a defect is not a genuine risk and refuse to pay for the policy. It is not uncommon in this scenario for a buyer and a seller to split the cost.
  • Duty to the insurer: The insured is under a duty to disclose all material information known to them to the insurer, so that the insurer can fairly assess the risk prior to agreeing to underwrite a policy. Withholding any key information from the insurer could invalidate the policy.
  • Don’t take no for an answer: Just because one insurer will not cover a certain risk, it does not mean that other providers will also say no. It is always worth checking with more than one insurer, not only to compare the terms of their respective policies, but also to get the best price.   

Finally, whilst defective title insurance can prove a useful tool when dealing with an imperfect title, it does not remedy the problem. Be aware that if there are any material changes contrary to the terms of the policy, such as changing the prescribed use of the property or uncovering additional information regarding the nature of the defect, you should notify the insurer or arrange for the policy to be updated in order to prevent it from becoming invalid.  

Jade is an Associate in our Commercial Real Estate team.

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