Does Developer Insure a Property Until It's Completed?

Q.

I'm buying a new build house which I need to exchange contracts on next week but the property will not be finished for a further 3 months, therefore the sale will not complete until then. I can't get a straight answer whether I need buildings insurance from exchange (ie next week), or whether the developer insures the property until it's complete?

A.

Confusion may have arisen because of the differences between the conveyancing process for second-hand and new build properties.

Property purchases generally come in two stages. The buyer and seller first exchange contracts, after which they both have a legal commitment to finalise the transaction. The buyer usually pays a deposit, which he is likely to lose if he subsequently pulls out of the sale, and a date for completion will be set.

Completion subsequently takes place when the balance of the purchase price is paid to the seller and ownership of the property transfers to the buyer. With a new build property, which is unfinished at the time of exchange, it will not be possible to fix a completion date. However, the contract is likely to state that legal completion must take place within a certain number of days after the property is finished.

Insurance and Second Hand Properties

In the case of the purchase of a second-hand property, as a matter of basic law, the buyer becomes responsible for the property from exchange of contracts. The buyer will usually still have to complete on the purchase even if the property is damaged or destroyed between exchange and completion. Therefore the buyer should have buildings insurance in place from the date of exchange. Additionally, the buyer’s mortgage company may require the buyer to have buildings insurance in place.

The contract for the sale of a property may specifically state that the seller remains responsible for the property until completion. Indeed one of the standard forms of contract for the sale of land or property includes a clause to this effect. This does not automatically mean that the seller has to insure the property. If the seller fails to insure the property and it is damaged prior to completion the buyer may still sue him for damages. A clause may, however, be included in the contract which states that the seller must insure the property until completion.

There may be instances where both buyer and seller have buildings insurance in place for the period between exchange and completion.

Insurance and New Builds

The purchase process for a new build property differs in many respects from the process for the purchase of an existing home. In particular, the seller should usually remain responsible for insuring the property until completion takes place. Indeed site insurance should be in place for the duration of the development. However, unless the sale contract specifically covers this point the basic legal position will apply meaning that responsibility for insurance rests with the buyer.

The contract for the purchase of a new build property will probably be provided by the developer who might refuse to agree to any amendments. This contract should, however, deal with the insurance question. You, or your conveyancer, should read the contract carefully to establish who is responsible for insuring the property between exchange and completion. Remember that if the contract does not mention it, the responsibility will probably be yours.