Are conveyancers over charging on ‘mum and dad’ assisted property transactions?

Introduction

The principle behind the insurance is that it protects the mortgagee’s (i.e. bank lending the money) title in the property if the donor of a gift or informal family loan goes bankrupt and  the donor’s creditors make a claim to the money as part of the donor’s assets.

But is it necessary?  Do all conveyancers actually understand the applicable law?

Background

The conveyancer is under a duty to both client and the client’s lender to ensure they obtain “a good and marketable title to the property and free from prior mortgages or charges and from onerous encumbrances which title will be registered with absolute title” (Solicitors’ Regulation Authority Handbook).

If there is a gift from a family member ( or a discounted purchase price when purchasing from a family member) or an informal loan the donor on the face of it will acquire an interest in the property. Gifted deposit insurance provides protection if the donor becomes insolvent and creditors of the donor make a claim putting the property at risk as well as the lender’s security.

The Law

The law behinds this is S339 of the Insolvency Act 1986 provides that if a bankrupt has within the previous five years “entered into a transaction with any person at an undervalue,” then “the trustee of the bankrupt’s estate may apply to the court for an order” to restore  the gift to the donor for the benefit of the creditors.

However S342(2)(a) offers the lender with protection stating that if an order is made under S339  this will not …. prejudice any interest in property which was acquired from a person other than that individual and was acquired in good faith and for value, or prejudice any interest deriving from such an interest”. Essentially the bank is protected from a Section 339 order by S.342 as long as it acts honestly and doesn't knowingly aid dishonesty. Its title in the property is therefore protected and in no way placed at risk .

The only time a  lender may not avail itself of this protection if the lender knew both that there was a gift/transaction at an undervalue and that the donor was already insolvent or a petition of bankruptcy had been presented when the gift was made. Hence the need for the conveyancer to carry our ID and bankruptcy checks against the donor.

Interestingly if this situation was allowed to arise then gifted deposit insurance would not assist in any event.

If the gift was specially made to put it beyond the reach of creditors, an order could be made under  Sections 423–425 of the Insolvency Act to restore the position to that before the transaction at an undervalue. Section 425 however would protect the lender if its interest was “acquired in good faith, for value and without notice of the relevant circumstances”.  Again unless the lender was aware of what was going on the lender would not be affected by the insolvency.

Council for Mortgage Lenders Handbook

This states:

‘If you are aware that the title to the property is subject to a deed of gift or a transaction at an apparent undervalue completed within five years of the proposed mortgage then you must be satisfied that we will acquire our interest in good faith and will be protected under the provisions of the Insolvency (No 2) Act 1994 against our security being set aside. If you are unable to give an unqualified certificate of title, you must arrange indemnity insurance (see section 9)

‘You must effect an indemnity insurance policy whenever the Lenders’ Handbook identifies that this is an acceptable or required course to us to ensure that the property has a good and marketable title at completion’.

Practical Implications

Providing the checks on identification and bankruptcy come back all clear,  it would seem from this analysis that an unqualified certificate of title could be given to the lender where there is a gifted deposit.

Is there a need to obtain a letter of postponement from the donor, that is a ‘gift letter’.  Probably yes in terms of good practice though the Land Registration Act 2002 does provide that a mortgagee has priority over any claim that the donor may have for the return of the gift,

Conclusion

By blindly insisting on indemnity insurance which appears on the above analysis of the law to be wholly unnecessary it seems conveyancers are not acting in their clients best interests.   

At the time the Insolvency ( No2) Act 1994 ( which made amendments to S342 (2) (a)  was passing through the then House of Lords Lord Coleraine said:

“the saving in that section [of the Insolvency Act] for a third party purchaser for value and in good faith will no longer be negatived merely by the purchaser’s knowledge of an earlier transaction at an undervalue or preference … the effect of the clause should be to speed conveyancing and greatly reduce the need for insurance in the cases where problems arise” (Hansard 1994 vol 554 at para 348).

Clearly the insurance industry is also very much guilty in terms of selling and promoting an insurance which seems to offer no purpose other than as a comforter to conveyancers.

There should also be a call made on the Council for Mortgage Lenders to review and to amend the Handbook to make the requirements  for seeking indemnity insurance on a gifted deposit clear and more in line with the Insolvency legislation.

Source :   *Gifted deposits and indemnity insurance: a risk assessment, Nick Piška, Conv. 2015, 2, 133-147  (Subscription required)

 MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877067 or via email at david@mjpconveyancing.com

Building Regulations: Cottingham v Attey Bower & Jones Re-Visited

Time and time again I am asked by buyer’s solicitors for indemnity insurance to address the absence of building regulation approval for home improvements such as an extension.  In the majority of these cases there is no justification for the cost of establishing an indemnity policy and though I do my best to argue my case I am frequently met with misconceived responses. The truth is that many conveyancers do not have the time to consider the law and the easy route is to ask for insurance. 

I am sure I am not alone when I say I did not become a lawyer to ignore the law and to follow blindly practices which have through laziness become  the norm.  I recognise conveyancing is very much rooted in practice but there is applicable case law and statutory provision which ought at times to be considered. 

So when asked for indemnity insurance to address the absence of building regulation approval and or a completion certificate a competent conveyancer should look at the facts and apply the law accordingly.  The offer of indemnity insurance look be looked upon as a last resort option. 

The first question to consider is when was the work carried out.  If it was completed within the last 12 months then my view would be to insist on the seller seeking retrospective  building regulation approval/completion certificate.   The Law Society's Conveyancing Handbook, makes it clear that only where work had been done in the preceding 12 months should the purchaser's solicitor enquire whether building regulations consent was obtained and complied with. Don’t even consider indemnity insurance in these cases.  This is a sticking plaster and in the words of Taylor Swift ‘Band-aids don't fix bullet holes’!  Most lenders would also require  retrospective consent remembering of course that the lack of approval and or a completion certificate should be reported. 

If it was carried out over 12 months then the seller should be asked whether it was work undertaken under concealment which would not of course be the case if planning permission was sought.  The seller should also be asked if building regulation approval has ever been refused.  It should also be ascertained with reference to your clients survey whether the work is likely to give rise to serious threat to life and safety. If for example the work was undertaken 20 years ago and the works are viewed by the surveyor as sound it would be difficult to see how a local authority could even contemplate injunctive action under section 36(6) of the Buildings Act.  

Keep in mind when asked for that costly and often unnecessary indemnity policy that it is there to protect the client from enforcement action under s36(6) not to provide protection if the works subsequently prove defective.   So one has to weigh up the risk of enforcement and in doing this it well worth keeping in mind that in 1998 an enforcement concordat was signed and adopted by almost all local government organisations with an enforcement function. This requires building control departments when carrying out enforcement to take a consistent approach and treat matters with proportionality, effectively making it unthinkable that injunction proceedings would now be utilised in relation to a minor item of domestic building work that took place years before.

Birmingham building control unit, the largest in the country, only had to resort to court action in five cases in 2003.

In cases where I argue indemnity insurance is not necessary or indeed required those competent conveyancers acting for the buyer often trot out the argument that following  the decision in Cottingham v Attey Bower & Jones [2000] PNLR 557 there is no longer any time limit on enforcement and therefore indemnity insurance should be sought in every instance where there is no building regulation approval.

This is an interesting authority and one which is not really based on the risk of enforcement but has more to do with the defectiveness of works carried out.  In Cottingham the buyer's claim related to the cost of rectification of the defective works and not loss arising out of enforcement action. In fact there was no enforcement action taken or indeed threatened.  The claim would have been brought against the buyer’s surveyor and the seller had it not been for doubt as to their financial standing. 

Its is also based on the the failure of the buyer’s solicitor to make adequate inquiry about building regulation approval.   This would suggest that if a buyer asks about building approval and discovers this has not been sought then if in the judgment of the buyer’s solicitor there is no or little risk of enforcement ( relying for instance on the survey) it could be argued with justification that the buyer’s solicitor in not  pursuing the issue has acted in the best interests of his or her client.  The only proviso to this is that the buyer client should be warned there is a risk of enforcement albeit a minimal one. Providing this advice is given it would be difficult to see a Cottingham situation arising particular in the light of the 1998 Concordat. 

In short there is a need to look at each individual case on its own merits and to be bold enough to make a judgement call based on both case law, statute and the practice  direction of the enforcement agencies. 

MJP Conveyancing are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk

Are you allowing your clients to be ripped off by indemnity insurers?

The cost of moving could in some transactions be reduced if more lawyers took time to consider planning and building regulation requirements more closely. 

The knee jerk reaction by some to jump to the tune of indemnity indemnity insurers and take out unnecessary insurance is inexcusable. Often clients are asked to pay several hundred pounds for insurance which if the lawyer took more time to consider the case would not be required. 

In this article I try and set out my thoughts on what lawyers should be thinking and doing when considering the planning and building regulations requirements of changes and additions to a property being purchased or sold by a client. 

If you know about an alteration or addition to a property that has happened in the last four years or a change in use within the past 10 years the yes insist on seeing the planning.  It's important to check the conditions if any to ensure there has been full compliance. If consent doesn't exist then indemnity insurance can be considered.  Check with the lender if the client is purchasing with a mortgage since the lender may not depending on the circumstances be willing to lend. 

However if changes have taken outside these periods ( 4 years where there is planning consent without conditions and 10 when there are conditions or change of use ) is it really necessary to push for sight of the planning consent. If you know the work was not concealed and the local search result shows no breach of condition is it really necessary to call for and par for indemnity insurance? 

The Planning Act 1990 states that lack of consent for work completed over 4 years ago is unenforceable and there is immunity for breach of condition or change of use after 10 years. You should if acting for the buyer ask the seller to confirm that the work was not concealed as in the case of Welwyn Hatfield Council v. SSCLG [2010] EWCA Civ 26 & R. (Fidler) v. SSCLG - [2011] EWCA Civ 1159

Why waste money on indemnity insurance which is wholly unnecessary and only serves to put easy money into the pockets of indemnity insurers. 

Turning now to building regulation approval. If the works were pre 1985 there is no need to worry if no approval or completion certificate exists. Local  Authorities were not compelled to keep records until the advent of the Building Act 1984. So dont be tempted to take out insurance. 

The Buildings Act 1984 was the first time that the Authority was required to keep records of Buildings Regulations. 

If the works were carried out post 1985 and a Building Regulations Completion Certificate is revealed by your search there is no need to seek a copy unless you are unsure about what it covers. 

If work was carried out in the past 12 months and there is no reference to it in the local search report then report to lender if purchasing with a mortgage and  check with Valuer/Surveyor as to structural integrity of the alteration and the issues that arise if the client were to undertake additional works.  In this situation always seek subject to the lender’s approval indemnity insurance because  the Local Authority has rights to serve a Stop or Enforcement notice within 12 months under the Buildings Act 1984. Consider whether a retrospective certificate should be sought. 

If work undertaken more than 12 months ago and there is no evidence of a completion certificate then  advise the client of lack of  availability of a Completion Certificate and to check with Valuer/Surveyor as to structural integrity of the alteration and the issues that arise if they wish to undertake additional works.    

If the surveyor has concerns then if there is a lender involved advise straight away and consider seeking a retrospective certificate or indemnity insurance. Advise the client on the exposure to enforcement action. These situations are the exception rather than the rule. 

If there are no concerns its unlikely the client would be exposed to enforcement action because  there would be nothing in the public interest to support an application for an injunction under s.36(6) of the Buildings Act 1984 to seek demolition of the works unless the works has been concealed and or present a health and safety issue to the public.  In my opinion don't waste money on indemnity insurance. 

So what about installation certificates?

The same applies as above and to help I have put together a draft reply to deal with those countless requests for charitable donations to the indemnity insurers coffers. 

This is the reply I suggest when a seller is asked for indemnity insurance for the absence of a FENSA or other installation certificate where these are shown to exist in the buyers local authority search:

It is clear from the result of the local authority search that the installation was undertaken according to requisite building regulations and therefore there is no scope to argue your client will be exposed to enforcement action.  Indemnity insurance is therefore unnecessary and will not be offered.  If you disagree then we would ask you to cite legal authority to support your argument that indemnity cover is necessary and indeed essential in terms of protecting your client’s interests. 

The reply of a seller when asked for indemnity insurance for the absence of a FENSA or other installation certificate where this is not disclosed in the result of the local authority search would I suggest be as follows: 

The time for enforcement action ended some time ago and unless the Local Authority can show that the installation presents a danger to the public then there is no scope to argue your client will be exposed to enforcement action. Indemnity insurance is therefore unnecessary and will not be offered.  If you disagree then we would ask you to cite legal authority to support your argument that indemnity cover is necessary and indeed essential in terms of protecting your client’s interests. 

As mentioned above if there is no evidence of building regulation compliance your client is better off paying for a competent contractor to inspect and report on the installation than wasting money on indemnity insurance. The risk of enforcement action is very low compared with the cost of replacement if the work was carried out haphazardly. 

Do keep in mind every transaction is different and the above general observations and guidance may not always apply. If you are a homebuyer or seller you should always take advice from an experienced conveyancer. The above is offered as guidance rather than advice that can be relied upon. 

Morgan Jones and Pett are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk

Lack of Building Regulations – Why is it such a problem when moving home?

Solicitors should always when a property is to be purchased ask if there has been any alteration made to a property, and whether planning permission and/or building regulations approval has been obtained.  At one time if no enforcement action in relation to building regulation was not taken within 12 months the buyer could proceed without fear of assuming the risk of liability.

However, in the case of Cottingham v Attey Bower & Jones [2000] PNLR 557, a firm of Solicitors were held negligent because they had not adequately investigated whether works had building regulation approval.  The building works required £30,000.00 worth of repairs and the buyer’s Solicitor was held responsible for the cost of this, because it was held that even though no enforcement action had been taken in 12 months it was still open to the Council to apply for an injunction at any time.

Since this case Conveyancers have always erred on the side of caution and ask for a copy of building regulations approval for any works irrespective of when they were undertaken.   The problem they often face is that Councils do not always keep a copy of the building regulation documentation for more than 4 or 5 years.

You may ask why a Council would bother to enforce say after 20 years. Realistically the chance of action is remote, but it is not inconceivable, because if the works   later raise a Health and Safety issue then the Council would probably not hesitate in taking action.

If you are a purchaser with a mortgage the situation is not going to be helped, because lenders are aware of this case, and always ask as a condition of the mortgage for confirmation the building approval has been obtained.  Sometimes a lender can allow the lack of building regulations to go through, if an indemnity policy, that is an insurance policy, is taken out to protect against possible enforcement action.

Insurance can only be obtained however if the Council has not been alerted to the fact of the absence of building regulation approval.  Interestingly therefore it is perhaps best at times for no inquiry to be made with the Council.

No all lenders however accept insurance.  It is down to the solicitor to check with the lender.

Insurance may not always be the answer because if there have been structural alterations undertaken, and there is no building regulation approval, then it is obviously important to make sure that the property is safe.  In those circumstances a structural survey is clearly essential and is likely to be requested by the lender.

So to recap if it’s found out there had been structural alterations, the first step is to ask the seller whether there has been any building approval.  If there is not, then to enquire about insurance, but to also give consideration to whether:-

-       The lender you are borrowing from is prepared to accept insurance.

-       Whether you are in fact prepared to accept this, because you could be buying a house that has structural problems.  Indeed it’s for this reason I always advise that a full survey should be obtained before contracts are exchanged.

Before paying for indemnity insurance please read this article by the same author:  Overuse of indemnity insurance 

By David Pett - davidpett@m-j-p.co.uk 

Is property indemnity insurance over used in conveyancing?

There seems to be a tendency these days to take the easy route whenever a problem with title arises.  Rather than carrying out investigation to inquire whether an alternative solution exists, an increasing number of conveyancers are turning to indemnity insurance to ‘plug the hole’.

I can understand the reason.  Conveyancing fees are being squeezed and there is pressure to move transactions quickly and with the minimum of case handler input.   On top of this is the increased pressure we all receive from clients to ensure there is minimum delay during the process.   Clients generally have only two priorities when moving home - to move quickly and at little cost.

It is often easier for a practitioner to ask the client to pay for the indemnity policy than to ask for extra fees to investigate other solutions.

I question however whether taking out indemnity cover is always the right decision to take.  Take for example the lack of building regulations.   Yes insurance is available to cover the cost of enforcement action but this does not address whether the loft conversion for instance is structurally safe.  I recognize this should be pretty evident to most of us but there is wide spread ignorance of cover afforded by indemnity policies.

In my view insurance should be viewed as a ‘last resort’ solution and one that should only be used after investigations of other solutions are at an end.  Yes this would mean extra work but if the reason for this is explained then there should not be any problem obtaining money from the client.  

Conveyancers should always check the terms and limitations of policy cover; failure to do so could result in a negligence action.  Conveyancers should also when a lender is involved consider the policy of the particular lender relating to the use of such policies.  If a policy already exists always check it against the current valuation of the property and consider if necessary top up insurance.

My other issue with indemnity policy is that there is no register to check whether a policy on a property has been previously established.   It would not take too much for the Land Registry to make it a requirement that policies activated on a property should be noted on the title.

Perhaps another answer is the adoption of a property logbook – as a firm we have developed an electronic logbook into which we upload for clients all documents (including the indemnity policy) relating to the property and which they will need when they come to sell.  We also include a loyalty voucher to ensure as best we can that the client comes back to us in the future.  If anybody wishes to know more about this product please feel free to email me

Morgan Jones and Pett are solicitors who provide legal advice and services to clients based in England and Wales and who can be contacted on 01603877000 or via email at davidpett@m-j-p.co.uk