Defective Lease · Report on Title scenario
No. It pays money if the defect causes loss; the lease is exactly as defective the day after the policy is issued as it was the day before. That distinction is easy to agree with in the abstract and easy to forget in a transaction, and the place it resurfaces is a lender's requirements — now or on the sale after next.
From the e-ROT archive
This scenario is drawn from Report on Title material dealing with this specific circumstance.
An indemnity policy is a contract to pay if a specified bad thing happens. It does not change the lease, it does not bind the landlord, and it does not oblige anybody to put right what is wrong.
That is enough when the defect is unlikely ever to bite and the only cost is transactional friction. It is not enough when the defect is one somebody will have to live with — a missing right of access that you need, an insuring arrangement that cannot fund a rebuild.
If a lease defect you were told was covered is holding up a sale, what was explained to you about the policy during the purchase is where the question starts.
Find out what should have been explained → WhenIBought.comThat a policy makes the defect acceptable to lenders. The Lexsure wording below calls this assumption patently wrong, and it is worth dwelling on why.
Lender requirements about defective leases and about insurance as a solution are set individually and revised frequently. A policy acceptable to your lender today tells you nothing about what your buyer's lender will want in five years, and a significant proportion of lenders will not treat insurance as a solution at all.
Ask what the defect actually prevents. A defect that is a theoretical gap in drafting is a good candidate for insurance; a defect that stops you doing something you need to do is not.
Ask whether a deed of variation is realistically available, and what it would cost. If the landlord is engaged and the fix is affordable, it is almost always the better answer, because it is the only one that stops the question recurring.
Ask whether the policy runs with the property. Most do; some — notably mortgagee protection policies — do not, and that changes the arithmetic completely.
And if you do insure, keep the policy document. It is the thing your buyer's solicitor will ask for.
Acceptability of indemnity insurance where lease terms are defective is a requirement lenders set for themselves, and it is one of the most frequently revised areas in the lenders' handbook. Requirements differ on whether insurance is acceptable at all, on the form and amount of cover, and on which defects can be insured rather than cured.
That variation is the reason a policy is a weaker answer than it looks: it satisfies one lender on one day.
The Lexsure Lender Archive holds the current and historic answers lender by lender, which is how a conveyancer establishes what this lender requires rather than what lenders generally do.
Research lender requirements → Lexsure Lender ArchiveFrom the e-ROT archive
Report on Title paragraph
Even though defective title insurance is an option for you, and indeed one that we would recommend, you should note that this does not remedy the insured defect. Where insurance is taken out, it merely offers financial compensation. It is often wrongly assumed that the existence of insurance would ensure that the defect is not a concern to lenders (either now or in the future). This is patently wrong. …
Historic wording — DO NOT USE on a current transaction. Published in June 2022 and reproduced exactly. The paragraph it comes from continues with figures drawn from charts about lender requirements; those are not reproduced, and no figure from them appears on this page.
Do not rely on wording copied or saved from this page. Get the current wording dealing with this scenario.
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