Moving home is an exciting time, but it can also come with its fair share of complexities. Sometimes, during the conveyancing process, unexpected issues pop up that could potentially delay or even derail your sale or purchase. This is where indemnity policies often step in, acting as a practical safety net to keep things moving forward.

What Exactly is an Indemnity Policy?

Think of an indemnity policy as a special type of insurance designed to protect either the buyer or the lender (or both) against a specific, known legal defect with a property. It's not about covering physical damage to the house, but rather about safeguarding against potential financial losses that could arise from a legal problem that can't be easily resolved in the short term.

For example, imagine a situation where a previous owner made an alteration to the property without obtaining the necessary planning permission or building regulations approval. Rectifying this retrospectively can be costly, time-consuming, and sometimes impossible. An indemnity policy, in this instance, would cover the new owner for any financial loss if the local authority were to take enforcement action in the future.

When Do Indemnity Policies Typically Arise?

Indemnity policies are usually suggested by your conveyancer when they uncover a specific defect during their searches and investigations. Here are some common scenarios where they might be used:

1. Lack of Building Regulations or Planning Permission

This is one of the most frequent reasons. If an extension, loft conversion, or other significant alteration was carried out without the correct approvals, an indemnity policy can protect against the risk of the local council demanding the work be altered or demolished. It's important to note that the policy doesn't make the work compliant, but it does cover the financial fallout if the issue is ever enforced.

2. Missing Restrictive Covenants

Many properties have restrictive covenants, which are rules about what you can or cannot do with the land. If the original documents detailing these covenants are lost or unclear, an indemnity policy can protect against a third party trying to enforce an unknown covenant in the future.

3. Absence of Easements or Rights of Way

Sometimes, a property might rely on a right of way over neighbouring land, or a pipe might run under a neighbour's garden, but there's no formal legal document (easement) to confirm this right. An indemnity policy can cover the risk if the neighbour were to challenge this arrangement.

4. Chancel Repair Liability

This is a less common but historically significant issue. Some properties, particularly older ones, can have a 'chancel repair liability,' meaning the owner could be responsible for contributing to the repair of a local church's chancel. If this liability is unclear or unregistered, an indemnity policy can provide protection.

5. Insolvency Act Indemnity

If a property has been sold by a seller who was recently bankrupt or insolvent, an indemnity policy might be taken out to protect against the sale being challenged by a trustee in bankruptcy at a later date.

Who Pays for It and What Does it Cover?

Typically, the seller pays for the indemnity policy as it helps them to sell their property without having to resolve the underlying issue. However, sometimes it can be negotiated between buyer and seller. The cost is usually a one-off payment, and the policy lasts indefinitely, covering future owners of the property too.

It's crucial to understand that an indemnity policy doesn't fix the problem itself. It simply provides financial compensation if the specific, insured risk materialises. Your conveyancer will explain the exact coverage and limitations of any policy proposed.

When a Mortgage Lender Steps In: Insisting or Refusing Indemnity Policies

When you're buying a property with a mortgage, your lender has a vested interest in ensuring the property is a sound investment and that their security isn't compromised by legal defects. This is why they often have a say in indemnity policies.

When a Lender Might Insist on an Indemnity Policy:

Lenders will typically insist on an indemnity policy when a legal defect is identified that, while not immediately critical, could pose a future financial risk to the property's value or marketability. For example:

• Unauthorised Alterations: If an extension or conversion lacks the correct building regulations or planning permission, a lender will often require an indemnity policy. This protects them (and you) if the local authority ever demands the work be rectified, which could be costly and reduce the property's value.
• Missing Rights of Way or Easements: If the property relies on access over land not owned by it, or if services (like drains) run through neighbouring land without formal legal rights, a lender will want an indemnity policy. This safeguards against a neighbour challenging these arrangements, which could severely impact the property's usability and value.
• Restrictive Covenants: If there's a risk of an unknown or unenforced restrictive covenant being enforced in the future, a lender might require a policy to protect against potential financial loss or legal action.
• Chancel Repair Liability: Although rare, if this liability is identified and unregistered, lenders will almost certainly require an indemnity policy to cover the potential cost of church repairs.

In essence, if a legal defect could make the property difficult to sell in the future or reduce its value, a lender will likely require an indemnity policy to mitigate their risk.

When a Lender Might Refuse an Indemnity Policy:

While indemnity policies are useful, they aren't a magic fix for every problem. There are situations where a lender might refuse to accept one, insisting on a more permanent solution:

• Active Enforcement Action: If the local authority is already aware of an unauthorised alteration and has started enforcement proceedings, an indemnity policy is unlikely to be accepted. The risk has already materialised, and the lender will want the issue resolved directly.
• Fundamental Structural Issues: An indemnity policy covers legal defects, not physical ones. If the unauthorised work has led to significant structural problems, the lender will require these to be fixed, not just insured against.
• High-Risk or Uninsurable Defects: Some defects are simply too high-risk or complex for an insurer to cover. If the legal issue is so severe that it fundamentally undermines the property's title or marketability, a lender may deem it uninsurable and refuse the mortgage until the defect is properly remedied.
• Lack of Practical Access/Services: If the property genuinely lacks a legal right of access or essential services (like water or drainage) and an indemnity policy doesn't adequately cover the practical implications, a lender might refuse. They need assurance that the property is fully functional and accessible.

In these cases, the lender will typically require the underlying legal issue to be resolved by the seller before they will proceed with the mortgage. This might involve obtaining retrospective planning permission, negotiating formal easements, or undertaking remedial works.

Our Approach: Honest Advice, No Jargon

At our agency, we believe in putting people before property. We know that understanding legal intricacies like indemnity policies and lender requirements can feel overwhelming. That's why we're here to help, every step of the way, offering honest advice, no jargon. We'll ensure you fully understand any policies involved in your transaction, so you can make informed decisions with confidence.

Moving home doesn't have to be stressful – let's make it easier together. If you have any questions about indemnity policies, lender requirements, or any other aspect of buying or selling, don't hesitate to contact our team. We'd love to chat and help you move forward with trust, heart, and a bit of magic.