NO LOCAL SEARCH - A RISKY DECISION?

What are the risks of a property buyer not having a local search carried out? In a typical property transaction, the buyer will have a local search, drainage and water searches, and various other searches and enquiries carried out.

As a buyer, it’s important to understand that a fundamental tenet of conveyancing is caveat emptor - ‘buyer beware’. The consequence of caveat emptor is that if, after exchange of contracts, issues come to light which would have been apparent had the searches and investigations been undertaken, the buyer cannot then withdraw from the transaction without serious implications. So you cannot withdraw after exchange, just because you don’t like something that comes to light.

On exchange, the parties are legally bound to complete. If a party withdraws, the other can sue for potentially substantial damages, or ask the court to order specific performance.

Why is the local search important?

Searches allow the buyer (which, for our purposes, includes the party taking a commercial lease) to make an informed decision whether to proceed with the transaction. In the commercial context, searches are a vital part of the due diligence a company will typically undertake before committing financial resources to a new, valuable asset.

The local search would normally be the most significant search as it provides vital information about the property and its immediate vicinity, including whether there are any financial charges relating to the property; any new highways proposed that could affect the property; and planning entries that could prove critical to a potential buyer.

What are the risks of not having a local search?

Without a local search, property buyers may remain in the dark about issues affecting the property. Business buyers also have their commercial interests to protect. Businesses negotiating a lease, for instance, need to understand that landlords make no guarantees as to the suitability or commercial viability of premises for a buyer’s specific business purposes. There could, for instance, be financial charges registered by the local authority against the property, or adverse planning entries that could alter the buyer’s view of the property in light of its trade.

Property that is suitable for an office may not be deemed suitable for a shop. There could also be planning restrictions on ‘change of use’ from one commercial use to another. If no local search is carried out, the risk to the buyer is that an adverse planning issue could arise following completion. The buyer will probably have no legal remedy against either the landlord or the local authority - but will still be liable to pay the rent for an asset that may end up being commercially unusable.

After completion, you could discover that there are rail schemes, or proposed developments that may affect traffic flow, or a road scheme that will adversely affect the property. Whilst government compensation may be available, you will still have the inconvenience, significant relocation costs, and the business disruption of having to find alternative premises.

Another important issue involves financial charges. These are registered against the property and not the owner. If the seller has not paid off a financial charge before completion, it becomes the new owner’s liability. These could run into thousands of pounds.

A local search also shows whether a road is adopted by the local authority. A buyer who does not have a local search carried out may not know, until long after completion, that the road is unadopted, so the buyer will be responsible for at least a portion of its maintenance. The cost of repair and maintenance falling to the buyer could be significant.

When might a buyer decide not to have a local search?

The majority of solicitors strongly recommend that clients have a local search carried out before committing to a purchase or lease. Yet the reality is that, for a variety of reasons, buyers do not want to spend the time and/or the extra cash having a local search – or other searches.

Many of our clients avoid having a local search for economic reasons. Some clients do not want the added expense of a local search in circumstances where they are sure no adverse entries will arise. Other clients could be financially penalised by the seller if they delay exchange of contracts by having a local search.

Some clients choose not to have a local search for reasons of expediency. A buyer of an empty residential property, for instance, may want to complete quickly to avoid paying a further entire month’s rent on their current property.

For commercial clients, time can be of the essence for a number of reasons: the landlord might be insisting on a tight completion date; or the seller is under pressure further up the chain for a quick completion; or the buyer simply wants to take possession of the property quickly in order to get back to ‘business as usual’ and continue trading.

There are also situations where a search has been requested – but there is a delay in the results being issued (a local search can take 3-4 weeks). The risk here is that exchange of contracts could be delayed in circumstances where delay is not acceptable to the parties.

Whilst there are many valid business reasons for not having a local search, clients need to understand the risks. If you are contemplating purchasing a property, or you are negotiating lease terms, you must consider the potential implications of going ahead without a local search, and what you can do to protect yourself.

How can title indemnity insurance address the risks?

Title indemnity insurance is widely available in many different scenarios where a local search has not been carried out, or the results of searches not received before completion. Do note, however, that title insurance does not rectify the problem – it simply protects against the financial risk of not having a local search (or other important searches), and gives the buyer a level of security in the transaction.

Typically, ‘no search’ policies will cover losses in market value, and the legal and other costs of matters that arise out of issues that would have been revealed in the search results obtained before completion.

Lenders are increasingly willing to accept indemnity insurance in place of a local search, though many still require buyers to obtain the necessary searches. It is, however, important to note that indemnity insurance may only protect the lender, and not the purchaser or lessee. Our policies can cover both parties depending on the needs.

Time is of the essence in many transactions, and indemnity insurance can step in to protect the risk if obtaining a local search is not feasible. Recently, First Title was able to facilitate a timely completion for a client in the food and drink industry who was taking a 7-year lease of a unit in a food court. This was in a new mixed use development and the client wanted to start trading as soon as development was finished.

There was no time to procure a local search, so First Title provided a Known Risk title indemnity policy with a Rental Liability endorsement. Without title insurance, the client could have completed the transaction with the risk of financial loss, had the local authority later prevented it from trading.

How can First Title help?

No search title indemnity insurance is a vital tool for residential and commercial property buyers. First Title provides conveyancers with title insurance to protect many different types of risks for their clients that could arise following completion. Importantly, we provide both Known Risk and Unknown Risk indemnity cover.

Whether you just want to start trading as quickly as possible and avoid delays that procuring a local search may cause, or you cannot wait for the search result to come back because completion is imminent – we can help.

Find us at www.firsttitle.eu or call on 0207 160 8100.

 

 

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