A transaction is at an undervalue is when a Purchaser (or Donee) is buying a property from the Seller (or Donor) at a lower value than it is worth. For example; if a property has been valued at £600,000 but the Purchaser is buying for £500,000 then this would be classed as an undervalue transaction and the £100,000 could be classed as a ‘gift’, ‘a gifted deposit’ or a reduction in price. These types of transactions are more common amongst Family transactions whereby parents sell to the children or other relatives.
In particular if property is transferred between parties as a result of a family transaction or a court order or between two current owners unto one of the current owner’s name plus another new owner, then any Lender can be at risk in such a scenario. This is because if the donor becomes bankrupt after 5 years, then the property may be seized and be held by the Trustee’s in bankruptcy. This could therefore mean that the transaction could be classed as invalid leaving any lender at a loss.
A declaration of solvency signed by the donor should be obtained. This document is a form of protection for the Lender as it helps to outline that the donor was not bankrupt at the time the property was transferred and is therefore very important as it demonstrates the donor was solvent at the time the transaction took place. In addition to this, an undervalue indemnity policy should be taken to protect the Buyer. The indemnity policy protects the Lender against financial loss that may be incurred as a result of a claim being made by the Trustee in Bankruptcy. The key aim of the policy is to put the Lender back into the position they were before the claim was made.
If the transaction is an “arm’s length” transaction between unrelated (or related) sellers and buyers then any portion of the “gift” would be classed as a “vendor gifted deposit”. Any Lender would need to be made aware of this arrangement for various reasons, one of which includes transactions at an undervalue and again, it may be necessary to obtain declarations of solvency and/or indemnity insurance if the Lender so requires. However, it will be necessary for the Lender to be informed of any gifted deposit being made to any purchaser so that they can assess the situation. That would include funds being provided by a third party (usually parents) towards the purchase of property. Information may be required from any donor making such a gifted deposit to satisfy legislative requirements. It is therefore imperative to outline your intentions when making the mortgage application to avoid any delays later on when the Conveyancer reports the undervalue to the lender (which they have to do).
It is not possible to protect a buyer with the use of indemnity insurance against the provisions of the Insolvency Act.
Subsequent buyers of property which has been transferred at an undervalue obtain protection from the Insolvency Act 1986 as subsequently amended.
The laws for residential property and commercial property undervalues differ so it is worth seeking independent legal advice before proceeding with this type of transaction. Please contact Edward hands and Lewis for a professional opinion .Talk to our legal team