If you’re in the process of buying a property, an important consideration is insurance – you may need to have active buildings insurance prior to completion. The law is as follows:
In most cases, when a residential property is sold, the contract incorporates the Standard Conditions of Sale, the current edition being the fifth edition.
Standard Condition 5.1.1 provides that the property is at the risk of the Buyer from the date of the contract. This means that the Buyer should insure as from exchange of contracts. As the Buyer will not know exactly when contracts will be exchanged, the arrangements should be made in advance so that the policy is in place when contracts are exchanged.
The Seller will keep his own policy in force until completion, because of the risk that the Buyer might fail to complete.
On exchange there will normally be two insurance policies in force. If the property is damaged after exchange of contracts, then in a case where Standard Condition 5.1.1 applies, the Buyer would be required to complete the purchase and make a claim against his own insurance policy. The Seller would not need to make a claim against his insurers unless the Buyer failed to complete.
The Standard Conditions also deal with the situation where a property is let and the terms of the lease require the landlord to insure the property. If the parties agree, Standard Condition 5.1.2 can be brought into effect. This provides that the Seller is under an obligation to insure the property and to do everything necessary to keep the insurance in effect. If the property is damaged after exchange of contracts, the Seller must:
- pay to the Buyer on completion the insurance money which the Seller has received, so far as it has not already been applied in repairing or reinstating the property; and
- if no final payment has been received, assign to the Buyer at the Buyer’s expense all rights to claim under the policy. The assignment is to be in such form as the Buyer reasonably requires. Until the assignment has been completed, the Seller must hold the insurance money in trust for the Buyer.
The Seller also agrees to cancel his insurance policy on completion.
In most cases it is preferable for the Buyer to insure as from exchange. The cost of the premium for the period between exchange of contracts and completion will not usually be significant, when compared with the value of the property.
If the Buyer is to rely on the Seller’s insurance, it is essential to obtain full details of the policy, so that the Buyer is aware of any exclusions which apply, or any conditions which apply before a claim can be made.