Defective titles and how to resolve these issues through insurance.

Defective Title is a term you come across during conveyancing transactions with a broad definition. The simplest meaning of a defective title is something which has been done on the land or an issue (error, omission or missing) with information on the deeds to the property.

In theory, the seller’s solicitor should make a full investigation of the seller’s title prior to drafting the contract for sale. Any potential defects in that title should be made clear to the buyer in this contract and accepted by the buyer on exchange. Failing to do so would expose the seller in having to fix this issue, at the seller’s expense at a later date, even once the property has been sold.

In practice however, it is impossible to say if this step is always carried out thoroughly since, it is likely the seller’s solicitors placed a degree of reliance on the buyer’s conveyancer to deduce title correctly and ascertain if they are satisfied before the matter proceeds to exchange. It is not the purpose of this article to ascertain who is responsible for what; and we will therefore assume that the theoretical position is what the circumstances are, surrounding a particular transaction.

Assuming the seller’s conveyancer has investigated the title before issuing contract papers, and has identified a potential title defect which cannot be resolved quickly, they may consider obtaining defective title insurance in lieu of this defect. Most issues can be resolved in this way but it is very important to remember that not all issues can.

It is also worth noting that solicitors who advise clients about obtaining defective title insurance may fall into the category of a regulated activity under the Financial Services and Markets Act 2000 (latest amendment (31st December 2020)). Most solicitors however rely on an exemption as setout under Part XX of the Act, which allows them to both advise and arrange policies where these are so done in a scenario incidental to the conveyancing transaction; therefore not requiring separate regulation by the FCA.

Obtaining a policy

As with any service, a prudent conveyancing solicitor or seller should obtain a number of different quotes from different insurers to compare and ascertain the best option. Additionally, since the defect will be affecting the seller’s title, it is usually the seller who is responsible for the cost of obtaining this. That said, where a buyer has requested such a policy, the seller may be able to negotiate with the buyer to cover a proportion of the cost.

Once obtained, since the policy will be attached to the land, the policy must be mentioned on the contract and handed over to the buyer on completion. This point is also relevant where the seller was originally supplied a policy when they purchased the property. If so, instead of obtaining a new policy, the seller might be able to ‘top-up’ the premium of the existing policy which would in most cases, be cheaper than obtaining a new policy.

What information does an Insurance Company require before producing a policy?

The premium or whether a particular defect can in fact be insured at all, will depend on the nature of the insured risk. In addition, recent breaches or defects in title such as those on New Build Properties would naturally cost more to insure than once that have taken place a long time ago.

For an insurance underwriter to produce a quote, they will generally require answers to a set of standard questions. Namely, what the defect is, when the defect occurred, details (if any) of any corrective steps you have taken to resolve the issue, has anyone other than the owner of the land is aware of the fact that there is a defect (and if so, have they been in contact with the landowner) and the level of insurance required.

Once the above information has been supplied, the insurer will have enough information to make a decision as to whether a policy can be issued or not.

Considerations before accepting a policy when you are the buyer

Fast forward, from a buyer’s perspective, you have identified a title defect, the seller’s conveyancer has offered an indemnity policy. Does that conclude the matter? Not quite. There are a number of important considerations you must establish before agreeing to the policy.

Some of the key points to think about are the following –

1. Making sure that a complete disclosure has been made to the insurer by the seller/their solicitor of the insurer. If not, the policy could be invalid and the insurer will refuse to pay out in the event of a claim.
2. You must also check if the policy only covers the benefit of successors or a restriction applies to a named person on the policy. This is particularly important if you are being supplied with a policy by the seller, who themselves received when they purchased the property.
3. Does the premium cover the current sale price of the property? If not, you will need to obtain a top-up policy.
4. If the policy is already in place, you must ensure that no previous claims have been made on the policy.
5. You must also check if the policy is acceptable to any mortgage lenders. More recently, with a view to speed up the conveyancing process, some lenders are happy to proceed with some common policies without the need for express consent. Either way, you must first check the UK Finance Bankbook for the particular lender’s requirements before proceeding.

Don’t worry though; most of the points will be typically assessed by your conveyancing solicitor but don’t be complacent. As the buyer, ultimately, you will be responsible for the property and therefore it is crucial you carefully consider the above, in addition to relying on your conveyancer to ensure the policy meets your requirements. If you are in doubt, you must speak to your conveyancer for further advice and guidance.

Disclaimer – our articles are designed to give you guidance and information. There is no substitute for proper and direct advice, particularly as everyone’s circumstances are different. You must therefore speak with and seek specific legal advice from your solicitor. Our articles does not offer a warranty which you may place reliance on.