Your questions answered: buildings insurance & exchange of contracts
By Alan Boswell Group
Buying a property is not always a straightforward process and there are a lot of things you need to have in place as the sale progresses. Whether you are a landlord with a portfolio of homes, or this is your first buy-to-let property, understanding your responsibilities in the sale is vital. While legal paperwork and contracts will be handled by your conveyancer or solicitor, areas like buildings insurance will fall to you. Most buy-to-let mortgage providers require landlord buildings insurance.
However, many buyers are not aware of when home insurance needs to be in place during a sale and many are left asking, ‘do I need buildings insurance before exchange’? In this article, we will answer all your questions about short-term buildings insurance between exchange and completion.
After exchanging contracts, what insurance do you need?
Whether you are immediately renting the property out to tenants, or leaving it unoccupied for a short time, you must have appropriate insurance in place from the date of exchange. Buildings insurance on exchange is essential, especially if you have a mortgage on the property. It will cover your investment should something happen after contracts are exchanged, such as a fire, a flood, or other damage.
If you are storing possessions in the property, then you might also consider contents insurance, although generally as a landlord this isn’t necessary.
Do you need buildings insurance before exchange?
No you do not, but it is advisable to prepare cover so that it comes into force the moment contracts are exchanged. The exchange of contract is the point at which you become responsible for the property and should something happen before a policy is in place, but after the exchange, your investment would be at risk. Not only that, but if you have applied for a buy-to-let mortgage, it could delay the purchase if you don’t already have buildings insurance at exchange.
Is there any difference if the property is leasehold or freehold?
If you are buying a flat or apartment to rent out to tenants, then it is likely that you are buying a leasehold property. In these situations whether you need buildings insurance before exchange will depend on your lease agreement. Sometimes, a freeholder of the building will arrange insurance for the whole development and leaseholders are required to contribute towards this as part of their service charge.
What happens if you don't have buildings insurance?
If you don’t have buildings insurance on exchange of contracts, you can find yourself at risk. The standard Conditions of Sale (which are widely used by solicitors in the UK), state buyers must have a valid insurance policy in place from the moment of exchange of contracts. Failing to do so could cause delays and theoretically lead to the entire sale to falling through.
Some policies have a clause which extends cover of buildings insurance after exchange of contract. It is important to know that this kind of cover is only of benefit to the seller of the property. When buying a property you can’t depend on the seller’s buildings insurance after exchange as there is no guarantee they have it, or that it would adequately cover the property.
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What if you are buying a new build 'off plan'?
When you buy a new build property it will normally come with a warranty. The warranty that comes with an off plan new build will cover issues which arise relating to the building work only. Having buildings insurance after exchange will protect you for other kinds of damage, such as fire, flood, storms, or vandalism which would not be covered under the warranty.
Who is responsible for property repairs after exchange?
As a buyer, having buildings insurance cover between exchange and completion is essential because as soon as contracts are exchanged the responsibility is on you. If damage to the property occurs after exchange, the seller must let you know and you are responsible for repairs.
How do you arrange buildings insurance before exchange?
Arranging buildings insurance before exchange doesn’t have to be a challenge. Some landlords assume you need to arrange these policies quickly on the exchange day, but you can get everything in place beforehand. Most buildings insurance companies will give you the choice of a policy start date, so you can set up cover in advance once you know when the house will exchange.
Your insurance provider will need to know a lot of details about the property to provide an insurance quote. You should be able to get all the information you need to answer their questions from your conveyancer and the seller.
If there are any questions you aren’t able to answer then it is best to be honest with your insurer rather than guess and risk not being adequately covered should you need to make a claim. It is also always worth asking your solicitor to check over your buildings insurance before exchange.
What insurance do you need if you are not moving in straight away?
As a landlord, it is not uncommon to have properties empty for some time. Whether you are waiting for tenants to move in, or completing renovations before putting it up for lease, you need to have the right insurance. If the property is unoccupied for less than 60 days, then a standard landlord buildings insurance policy is normally adequate.
However, if the building will be vacant for longer then you will need the right kind of insurance in place. Unoccupied house insurance is designed for homes which are sitting empty for more than 60 days, while renovation insurance is the best choice for when you are having work done prior to the property being inhabited.
What should you look for in a buildings insurance policy?
When it comes to arranging buildings insurance before exchange, there are many options available to you. Knowing what to look out for in a policy can help you choose the right one for your requirements.
Most importantly, your insurance needs to cover the cost of completely rebuilding the property should it be totally destroyed. Other aspects to consider are index-linking your sum insured to reflect inflation and including legal expenses should any disputes arise.
To find out more about landlords insurance visit our Landlord Advice Hub, or contact our team on 01603 216399.