For certain real estate transactions, the parties involved may decide not to carry out the usual conveyancing searches, choosing instead to approach an insurer to secure a quotation for a “no-search” insurance policy. Policies are available for property owners, tenants and lenders.
A no-search policy may be perceived as a guard against not carrying out searches, and while a policy can provide a practical solution in certain situations, there are limitations to its use.
Armed with the knowledge of these limitations, the parties in a transaction may decide that a no-search policy provides sufficient protection. Alternatively, the buyer, tenant or lender may require searches to be carried out – taking the view that it is better to be aware of any potential issues in advance, rather than relying on a claim on an insurance policy after the transaction completes.
Policies only offer cover for the absence of specific search results and will exclude certain losses. They are also available where searches have been ordered but delayed at the point of exchange or completion, or where out-of-date searches are available but more up-to-date information might be revealed by a new search.
Searches covered by insurance
Not all searches will be covered by a no‑search insurance policy.
Policies do not generally cover risks associated with information discovered as a result of utilities/communications searches, infrastructure searches, title ownership searches, groundwork and flooding searches, and environmental searches.
Separate cover can usually be obtained in respect of environmental risks.
Which losses are covered?
The losses covered by a no-search insurance policy will be specified in the individual policy terms and conditions. Generally, an owner policy covers the reduction in the open-market value of the property caused by information that would have been revealed by the relevant search results. Cover for lenders may include any shortfall in the repayment of a mortgage or loan caused by the risk of not carrying out the searches.
The heads of loss for tenant cover are different. This reflects the fact that the tenant does not own the property and a reduction in its market value is not relevant when calculating a tenant’s losses.
Tenant cover typically includes (i) the rent that a tenant is liable to pay and (ii) loss of profit, in each case for the period during which the tenant is prevented from carrying on its business at the property.
Excluded losses
Excluded losses usually comprise (i) those resulting from information that the owner, lender or tenant was aware of at the start of the policy, (ii) those attributable to the registration of the property as common land, or town or village green, and (iii) losses resulting from a lack of planning permission for the construction, conversion and/or use of the property.
An important point to note is that a tenant policy will usually state that the tenant must be prevented from using the property by a court order and will not cover the situation where a tenant itself has assessed that the property is not fit for occupation because of information that would have been identified by the relevant search results.
Development transactions
No-search policies generally require that the property has been in the same continued use for at least 12 months prior to the start of the policy and that the buyer intends to continue that use.
Specific policies are available for transactions involving a property for which planning permission has been obtained for development, conversion or construction.
However, the losses covered under such polices are likely to account only for reduction in the market value of the property in its state at the start of the policy. A reduction in value of the developed property may not be covered, nor any increased development costs that may arise as a result of an adverse entry on any of the searches.
In development scenarios, which typically have a longer timescale for due diligence, the developer may take the view that it is better to be informed of likely barriers to development, or future disposals, by conducting searches rather than relying on insurance. This is particularly important in view of the fact that the insurance policy is unlikely to benefit future buyers or tenants of the development.
Other considerations
It is common for insurance policies to include restrictions on the future conduct of the insured, and these need to be considered. For example, the insurer’s consent may be required to disclose the existence of the policy to any third parties – other than the legal advisers of prospective buyers and their lenders – or to change the use of the property.
The cover will last for as long as the purchaser or tenant owns their interest in the property or, in the case of a lender, the charge remains outstanding, rather than benefiting any successors in title.
A no-search insurance policy can be a useful alternative to full search due diligence for certain transactions. Property owners, tenants and lenders must, however, be aware of its limitations and ensure they consider the risks of proceeding with insurance instead of search results.
In practice
Scenario: a tenant is taking a new lease of a warehouse
The tenant could choose to obtain an insurance policy instead of carrying out searches, on the basis that the policy will cover any rent it is obliged to pay and any loss of profit the tenant suffers during the period it cannot use the property owing to an issue that would have been revealed had searches been carried out.
Shortly after completion, it is discovered that major roadworks will be conducted near the property, severely impacting deliveries to the warehouse. The tenant then decides to shut the warehouse for a year while the roadworks are completed.
The tenant may wish to make a claim on the policy for the rent that it is obliged to pay and the lost profit during the period that the warehouse is closed – knowing that the roadworks would have been apparent from a local search result, including a search of information available at the local authority.
However, it is likely that the tenant’s claim for rent and loss of profit will not succeed. This is because it was the tenant’s decision to close the warehouse; occupation is not prevented by a court order.
Brian Hession is a real estate partner at Shoosmiths
