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
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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
