25 September 2015

Warning: Why buildings insurance is needed from exchange of contracts

During any conveyancing transaction in England and Wales, whether residential or commercial, matters can become fraught in the run up to exchange of contracts, which is the point at which a legally binding agreement between the parties is made.  This, understandably, leads to a reluctance by some, to provide full buildings insurance details to us, due to the perception that it is not required, or is simply an innocuous paper-pushing exercise.

However, there are very good reasons why this must be in place on or before exchange of contracts.  The Law Society’s Standard Conditions of Sale, for residential and commercial properties are incorporated into the contract in most cases and these provide that even if the property is damaged or destroyed between exchange of contracts and completion, the buyer must still complete and send the balance purchase price to the seller.  If they do not, they will find themselves in breach of contract, which could lead to them losing their deposit and being pursued through the courts for specific performance of the contract.

Further, if the buyer buys with the assistance of a mortgage, the lender will have its own set of requirements which must be followed, on or before exchange of contracts.  These specific instructions will be contained in their mortgage offer, mortgage conditions and in the lengthy Council of Mortgage Lender’s Handbook.  Such conditions and requirements often include the following:

  1. The policy must cover the property against damage caused by fire, lightning, aircraft, explosion, earthquake, storm, flood, escape of water or oil, riot, malicious damage, theft or attempted theft, falling trees and branches and aerials, subsidence, heave, landslip, collision, accidental damage to underground services, professional fees/demolition and site clearance costs and public liability.
  2. The policy must cover the property for full rebuilding cost, usually referred to in the valuation.
  3. The cover to be index linked.
  4. The excess not to exceed £1,000.00 for subsidence or £500.00 for all other risks.
  5. The policy to be in the joint names of the lender and the borrower, or with the lender’s interest noted.
  6. The insurer to notify the lender in the case of any non-renewal of the policy.

Needless to say, should anything happen to the property between exchange of contracts and completion and the lender finds that there is insufficient insurance in place, they may refuse to release the mortgage advance.  In a perfect world, the buyer would make a claim on the insurance and arrange for the property to be rebuilt using the proceeds claimed.

At Harrison Clark Rickerbys, we have detailed specialist knowledge of property transactions and the mechanics involved, to steer our clients through what can be a stressful process.  Knowledge of the law is important, but so is practical advice and knowledge of how third parties, such as mortgage lenders, operate and an eye for the detail involved.

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About the Author
Matthew Hayes, Partner, Head of Hereford Office, Real Estate Team
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Matt Hayes is a Hereford solicitor, specialising in real estate.

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