Selling a property at an undervalue

With property prices being so high nowadays, it is common for parents or family members to sell a property to a relative at a price lower than the market value (‘sale at an undervalue’). Although this is seen as an effective way to help their younger relatives climb onto the property ladder if the transaction involves a lender, it will usually require a Declaration of Solvency by the Seller(s) together with an Indemnity Insurance Policy.

Indemnity Insurance Policy and a Declaration of Solvency

This is a formal statement (‘the Statutory Declaration’) that states that the Seller(s) is/are selling the property has sufficient money to pay all their debts (they are solvent). This Statutory Declaration is requested by the Buyer’s solicitors if there is a mortgage involved. The mortgagor (‘the lender’) will ask the Buyer’s solicitor to obtain this, to ensure that the Seller(s) is/are not selling the property due to issues with debts.

It is a contractual agreement where one party (usually the Seller(s)) compensates the other party (usually the Buyer(s)) for an actual or potential loss or damage that could be sustained by the Buyer(s).

In relation to a sale at an undervalue, the Seller(s) insures the Buyer(s) that they are not selling the property as a way of evading creditors. If the Seller(s) becomes bankrupt within five years after the sale, the Seller(s) will be appointed a trustee in bankruptcy who will seize the property to pay the creditors. This would mean that the original sale of the property between  the Seller(s) and the Buyer(s) would be void and the lender would lose out. To prevent this an Indemnity Insurance Policy is taken out to indemnify the lender against this.

The significance of a Statutory Declaration and the Indemnity Insurance Policy

A Statutory Declaration is a document that is signed by the person making the statement (the declarant). It must be witnessed by a solicitor or  a commissioner of oaths at it is ‘sworn’. If this Statutory Declaration is made falsely, a person can be fined or sent to jail. Thus, it is always advisable to seek a solicitor’s service with this.

If the Seller(s) sells the property and  becomes bankrupt within five years, the individual appointed as the trustee in bankruptcy, can claim the property back to sell for raising funds to pay off the Seller’s debts. This would leave the lender in a vulnerable position, as they would lose out on the monies they lent to the Buyer(s). Thus, an Indemnity Insurance Policy protects the lender’s interest and gives them a means of recovering the money (and interest) on the Buyer’s purchase of the property.

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