When buying or taking a lease of property, your property lawyer will check the seller or landlord actually owns and has a right to sell or lease the property, carry out appropriate searches and make enquiries of the seller. There are a number of issues that could be revealed during this process from a potential chancel repair liability (an ancient obligation to pay towards the cost of repair of the parish church chancel) to restrictive covenants on the title (possibly restricting your intended use) or absence or breach of planning legislation or building regulations.
Fortunately, there are insurance products available to provide cover for these risks. We would always advise putting a policy in place in circumstances where there are title defects (something that would affect the owner’s right to sell or lease the property), restrictive covenants that have been breached, absence of building regulations or planning permission, chancel repair and other issues.
There are a number of ‘off the peg’ policies available, which are typically the ‘go to’ for conveyancing lawyers and are certainly a good starting point. These policies will usually cover reduction in market value, cost of alterations to the property, compensation/damages to a 3rd party, legal costs and expenses and any other costs that the insurers agree to cover. However, whilst these policies may be acceptable to purchasers of freehold or long leasehold property (and such policies are generally acceptable to mortgage lenders) they may not be sufficient when taking a rack rent lease (e.g. a lease of 15 years at a market rent). A policy that covers reduction in market value is of no use when the leasehold interest has no real monetary value, but merely obligations to pay rent and adhere to the terms of the lease.
A buyer, and certainly a tenant, should consider how the potential risks might impact its business in practice and what it needs from an insurance policy, which is likely to be cover for rental commitment (in the case of a tenant), loss of profit and relocation costs. There may well be other losses unique to a business or its circumstances. It is possible to obtain additional cover for these items but this can be expensive as the premiums are based on the maximum an insurer will pay out. There are a number of expert brokers in the market who are able to assist with bespoke policies.
If the cost of additional cover is too expensive, depending on the particular circumstances, you may decide to take one, all or an appropriate combination of the various elements of cover that may be available:
1. Basic Cover - reduction in market value, cost of alterations to the property, compensation/damages to a 3rd party, legal costs and expenses and any other costs that the insurers agree to cover;
2. Rental Commitment – to cover the rental payments for the term of the lease if you are unable to use the property;
3. Relocation costs – the costs of relocating the business;
4. Loss of Profit – usually this will be for a maximum of 1 year allowing time to relocate the business.
In the event of an issue arising, say there is a restriction not to use the property other than as a residential dwelling-house, and you were threatened with court action for breaching that restriction, the insurers would step in and take over conduct of the action. The insurer’s lawyers would consider the merits of defending the claim vs offering a settlement vs paying out for reduction in market value or any other potential course of action. If the issue related to a breach of planning or building regulations and the local authority required works to be carried out, the insurers would again look at the merits of defending the action vs carrying out the alterations or any other course of action that may be available.
It may therefore be the case that the basic policy provides an acceptable level of cover where the risks are remote or are unlikely to prevent trading, but where there is greater risk (perhaps the planning breach is more recent) it may be prudent to consider adding one or all of the other elements of cover.
Whatever the defect, it is important that you understand what is covered by any indemnity policy and how it will respond in the event of an issue arising. You should consider how the issue might affect your business and discuss with your lawyer or directly with an insurance broker to ensure that a legal indemnity policy will meet your needs. It is also important to check any existing insurance policies, such as business interruption insurance, to see if you may already have cover for any of the potential business losses.
CHARTERED LEGAL EXECUTIVE
T: 0113 8343705
Rob is a Chartered Legal Executive specialising in all aspects of commercial property including acquisitions, disposals, property finance and landlord and tenant work. He joined us in September 2019 from Mishcon de Reya LLP in London having relocated to Sheffield with his family.
This article is published by Goodman Grant Solicitors Ltd and correct as 04/03/21. Please note that the information and any commentary on the law contained in this article is provided free of charge for information purposes only. Every reasonable effort is made to make the information and commentary accurate and up to date but no responsibility for its accuracy and correctness, or for any consequences of relying on it, is assumed by the author or the publisher. The information and commentary does not, and is not intended to, amount to legal advice to any person on a specific case or matter.