What is an Indemnity Policy?

An indemnity policy is a type of insurance policy which is taken out against any loss arising from a defect in a Lease.  It is a policy that would normally last for 25 years.  It should cover mortgagees and "successors in title" which means that when the property is sold, a new policy will not be required.

 Why would there be a need for an Indemnity Policy in a Leasehold Property?

Leases have to conform to Guidelines set out by the Council for Mortgage Lenders (CML).  Most Leases created since the 1990's do conform to the Guidelines and therefore will be acceptable to mortgage lenders.  However, Leases drawn before the 1990's frequently do not conform to guidelines and therefore are regarded as defective.  With most defective Leases however it is possible to take out an Indemnity Policy which would be acceptable to the mortgage lender.  There are therefore 3 categories that Leases fall into:

• Leases which conform to the Guidelines
• Leases which do not conform to the Guidelines but where a policy will normally be acceptable to a mortgage lender
• Leases which do not conform to the guidelines and where the defect is so serious that indemnity policies will not solve the problem

In some circumstances if there is a defective Lease an indemnity policy may not always correct the problems for the following reasons:

• There can be practical difficulties caused by the defect which may put buyers off
• There can be a genuine debate between solicitors as to the interpretation to the guidelines
• If there is a range of difficulties it may affect saleability
• If there is a weak property market it is more likely that a potential purchaser might be put off by defects in the Lease.

  What are considered defects in a Lease?

Common defects in a lease can include:

a.     Type of Title (ownership)

Most title is called Absolute Leasehold Title which guarantees that the Lessor has ownership to grant the Lease.  In some cases you can only acquire Good Leasehold Title which means that the Lessor's right to grant the Lease is not guaranteed, usually in cases where some of the documentation has not been registered at the Land Registry.  If the Lease is held as Good Leasehold Title then an Indemnity Policy will probably have to be obtained.

b.       No right of access or right for services

A flat requires rights of way over two different areas:

• Within the building
• Outside the building to the nearest public highway

If either is missing then an indemnity policy will be required.

Very occasionally there are no rights for services to cross other parts of the building and if this is the case an indemnity is required.

c.     Maisonette Indemnity

Defects that can occur in a maisonette could include:

• Where the landlord does not promise to enforce any breaches against other Tenants should the other Tenants default in carrying out some requirement under the Lease.
• No adequate provisions for repair or maintenance.

 d.      Defects in Buildings Insurance Arrangements

If the building insurance arrangements are not adequate then this insurance will be required.  However, normally, the reason why the Insurance arrangements are not adequate is because the landlords do not enforce requirements against other Tenants.

Blocks of flats will have one of the following arrangements with regard to buildings insurance:

• The freehold owner or Management Company insures the whole block and each Tenant pays towards insurance.  This is the arrangement with almost all modern Leases and is the best arrangement.
• Each flat owner has to ensure their own flat.  There is a covenant or requirement by the Freehold owner to enforce compliance with the Lease.  This is not as good as the first option but no indemnity is required.
• Each flat owner has to insure their own flat and there is no covenant or requirement by the freehold owner to enforce compliance with the Lease.  In this situation an Indemnity Policy is required.

  e.        Absentee Landlord

There is a special policy that can be taken out if the Landlord doesn't exist.  Some mortgage lenders regard this as being so serious that it has to be reported to them.  Almost invariably, the reason why the landlords do not exist is because the companies have gone out of existence.

  Do I need a policy if I am a cash buyer?

If you are a cash buyer then obviously you are not dependant upon your mortgage lender requiring an indemnity policy.  However, you may chose to take out a policy to insure against problems in selling the property or any expenses or difficulties that may arise because of the defect in the Lease.

  Who pays for the Policy?

If the need for a policy is identified by us when we are acting for the buyer, we will normally contact the sellers' solicitors and ask that the seller pays.  Most sellers do pay but not always and in some cases there can be a debate between solicitors as to whether an Indemnity Policy is actually required as there can be different interpretations of the CML Guidelines.

  Would you sort the Indemnity Policy out for me?

Yes, if an indemnity policy was needed we would deal with this although of course you would have to sign the forms. 

  What provider do you use?

We use Aviva.

  How much does a Policy cost?

Policies vary both as to the type of policy and to the value of the property.  Typically, a policy with Aviva for a property below £200,000.00 would be £250 or less.  If there are a higher amount of defects the policy could be more expensive.

  How is the Indemnity Policy dealt with?

If a policy is required it will be obtained at the time of completion.  If the mortgage lenders require it then the policy will be sent to them.  If not, the policy will be released to you along with the rest of the surplus deeds.  You must make sure you keep it in a safe place since you will need it on a sale. 

  Are there any conditions?

There are conditions of the policy.  The main one is that you do not let any third party know of the existence of the Policy.  This is because if somebody else was aware of the Policy they could take advantage.

  Are there any other circumstances where an Indemnity Policy may be required 

Yes, for instance if you were selling a property and were unable to provide details of Building Regulations or consent or if you were buying a property and the searches provided are over a year old.