CONVEYANCING: INSURE AGAINST UNKNOWN RISKS OF BUYING PROPERTY
December 14, 2017
Buying a home is a big investment which means that it can also be a big risk. It’s smart to try to reduce that risk by getting building inspections before committing to buy a house, but even then, there are some defects or faults in the property that may not be obvious. That’s why it’s a great idea to insure your property against these unknown risks, just in case. Here’s what you need to know.
Once you have committed to buying a property, your conveyancer or conveyancing lawyer will review all the documents involved in your purchase of real property and raise any concerns with you before settlement. Settlement is the date that money changes hands for the purchase/sale of the property.
But even though they will exercise care and skill, there are some risks that won’t be obvious. In fact, you may not become aware of them until after you have moved into the property.
The old saying buyer beware is still very important to remember when buying real estate. Although vendors (sellers) are legally obliged to disclose many things, there are certain types of defects which may not be known and are not required to be disclosed. For this reason, a new type of insurance is available, known as title insurance.
Property defects and vendor obligations
Property defects usually fall into two categories:
- Patent defects, which are usually discovered by thorough inspections of the property before sale. For example, a building inspection may reveal that a house is riddled with termites. If the inspection is conducted before purchase, the purchase of the property can be made subject to a satisfactory building inspection report.
- Latent defects, which aren’t capable of being found, even after a thorough inspection is conducted.
A vendor is not obliged to disclose a patent defect because a purchaser could or should have detected that defect by conducting a reasonable investigation of the home. This is where the buyer beware principal becomes relevant: it’s not up to the vendor to point out all defects and it’s not in their interest to do so.
However, a vendor is not allowed to mislead or deceive a purchaser by deliberately concealing patent defects. This may lead to the purchaser taking legal action against the vendor for misleading and deceptive conduct.
If there is a latent defect in the property and the vendor wasn’t aware of it at any time in the lead up to settlement, the purchaser can’t take legal action against the vendor and must honour the sale.
But on the other hand, if a vendor is aware of a latent defect and fails to disclose it, they may have engaged in misleading and deceptive conduct and the purchaser may be entitled to take legal action against the vendor.
Purchasers can take out title insurance to protect themselves against both known and unknown risks. The insurance protects the purchaser until the property is resold, or until they choose to discontinue the insurance.
The Australian Institute of Conveyancers recommends that all property purchasers seriously consider title insurance.
Title insurance can be used to cover:
- Illegal building works or structures.
- Fraud or forgery.
- Impersonation prior to settlement.
- Mortgage or title fraud after settlement, for example a third party takes out a mortgage over the property without the purchaser’s knowledge.
- Defective registration of a document.
- Restricted right of access or use of services.
- Boundary issues such as encroachment by or on the insured property.
The insurance can be used to avoid the need for potentially expensive and lengthy litigation in the future.
Title insurance is usually a one-off low cost premium which protects the purchaser for the life of the ownership. It’s important to understand, however, that it doesn’t replace the work of a competent conveyancing lawyer. All purchasers should do everything they can to ensure that they are adequately covered and are taking steps to protect themselves throughout the purchasing transaction.