A sale at an undervalue is when a Purchaser is buying a property from the Seller at 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’ or a reductions in price. These types of transactions are more common amongst Family transactions whereby parents sell to the children or other relatives.
A Buyer can be at risk in such a scenario and should be careful how they proceed. This is because if a seller becomes bankrupt after 2 or 5 years of sale, then the property may be seized and be held by any trustee’s in bankruptcy. This could therefore mean that the original sale could be classed as invalid leaving a purchaser at a loss.
A seller’s solicitor should obtain what is known as a declaration of solvency signed by the seller. This document is a form of protection for the buyers as it helps to outline that the seller was not bankrupt at the time of sale and is therefore very important as it demonstrates the seller was ‘solvent’ when he was selling the property. In addition to this, an undervalue indemnity policy should be taken out by the Seller to protect the Buyer. The indemnity policy protects the Buyer against financial loss that may be incurred as a result of a claim being made against them. The key aim of the policy is to put the Purchaser back into the position they were before the claim was made. In this case the claim would potentially be from a trustee in bankruptcy trying to pursue any interest they believe they have in the property.
If having a lender for mortgage purposes, they will also require the declaration of solvency and the undervalue indemnity policy to be in place for their protection. It is indeed possible for the purchaser to see the ‘discount’ as their deposit but lenders usually have strict requirements on this and it is imperative to outline your intentions when making the mortgage application to avoid any delays later on when the buyers Conveyancer reports the undervalue to the lender (which they have to do).
The laws for residential property and commercial 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 .