Legal Guide
What is an Indemnity Policy? A Guide for Leasehold Flat Sellers
An indemnity policy is an insurance against a defined historic risk on the title to a flat. Sellers usually come across the idea when the buyer's solicitor asks for cover, or when their own solicitor flags a paperwork gap before exchange. This guide covers how it works, the do-not-contact rule and what mortgage lenders accept.
Why You Are Being Asked About an Indemnity Policy
Most sellers first hear of an indemnity policy mid-sale. The buyer's solicitor raises an enquiry referring to one, or your own solicitor reviews the title and flags a gap in the paperwork that needs covering before exchange. Either way the question lands the same: what is it, do you need it and who pays.
An indemnity policy (sometimes called legal indemnity insurance, defective title insurance or simply a "title indemnity") is an insurance, bought once, against a specific historic risk on the title to the flat. It does not put the underlying problem right. It transfers the financial consequences to an insurer, so that if the risk ever crystallises (a freeholder claiming for an unauthorised alteration, a covenant beneficiary demanding the works are undone, the local authority pursuing for missing building regs), the policy pays out.
Sellers turn to indemnity insurance because the original paperwork was lost long ago, because the party who should have given consent cannot be found or because contacting them now would do more harm than good. The buyer's solicitor will usually accept the policy as a workable substitute, provided the buyer's lender is willing to follow suit.
Will an Indemnity Policy Actually Fix the Problem?
Not in the legal sense. The wall stays knocked through, the building regulations completion certificate is still missing, the covenant has still been breached. What changes is who carries the cost if the risk materialises. The policy is a financial backstop, not a cure.
What the policy pays out for depends on the specific wording, but cover typically extends to the leaseholder's legal costs (defending a freeholder or covenant beneficiary's claim, or dealing with local-authority enforcement), any loss in the value of the flat caused by the breach being enforced and, where there is a civil claim against the leaseholder, the damages or settlement payable to the claimant. The policy does not cover the cost of voluntarily "fixing" the issue, e.g. bringing building work up to a suitable standard. The insured at the time, normally the buyer, makes the claim and the insurer pays out up to the cover limit. The seller pays nothing beyond the original premium.
For most buyers and their lenders, the financial backstop of an indemnity policy is enough, provided the risk is genuinely dormant. The reasoning is practical: if the freeholder has not enforced the breach in 20 years, the chance of them doing so now is small, and the insurer is willing to price that small chance into a one-off premium. The sale proceeds on that footing.
The cases where a policy will not be a viable option are the ones where the risk is no longer dormant. If the freeholder has already raised the issue, an indemnity policy almost certainly cannot be obtained, because the insurer is unlikely to insure a known live problem. If the buyer's lender insists on retrospective consent rather than insurance (more common for structural alterations), the policy is also ruled out: the lender, not the insurer, is the gatekeeper there.
The Most Important Rule: Don't Contact the Party Who Could Enforce the Issue
Indemnity policies usually contain a strict "no contact" or "no approach" condition. This means the buyer, seller or their advisers must not contact the person or authority who could enforce the problem without the insurer's consent. For an unauthorised leasehold alteration, that will usually be the freeholder or managing agent. For missing building regulations approval, it is usually the local authority. For a restrictive covenant, it is whoever has the benefit of the covenant. Approaching any of them about the specific issue can invalidate the policy or stop one being issued in the first place. Note that this is a rule about not contacting the enforcing party: the seller and the buyer's solicitor still need to disclose the issue to the buyer in the normal way, and doing so does not invalidate the policy.
The logic is simple. An insurer may be willing to cover a dormant risk, because the chance of enforcement may be low. If you ring the freeholder and ask whether they object to a knocked-through wall, you may have just alerted them to the breach. They might say yes, they might say no or they might say nothing. Either way, the issue is no longer purely dormant, and the insurer may refuse to provide cover.
This is the rule sellers often break in good faith. The instinct, when something unexpected appears in the title papers, is to call the freeholder, managing agent, council or other relevant party and try to sort it out. That instinct can close off the indemnity route before you know whether it was the best option. Instead of going straight to the freeholder to ask for retrospective consent to an alteration, the correct sequence is to speak to your conveyancer first, get a view on whether indemnity insurance is viable and then decide how to proceed. Contacting the party who could enforce the issue should usually be treated as a last step, not the first.
The Issues an Indemnity Policy Most Often Covers
In leasehold flat sales, indemnity policies are often used in four recurring situations. The pattern is usually the same: there is a historic act or omission that the seller cannot easily put right, the buyer's solicitor or lender wants comfort and the insurer is willing to cover the financial risk.
Unconsented alterations
This is one of the most common examples. A previous owner, or the current owner, may have knocked through a wall, replaced windows, fitted a new bathroom, changed the layout or laid hard flooring without first obtaining the freeholder's licence to alter. Whether consent was needed depends on the wording of the lease. If the lease required consent and consent was never obtained, the issue may come up years later when the buyer's solicitor reviews the title or the surveyor's report flags the work. An indemnity policy is designed to cover financial loss arising from future enforcement by the freeholder, subject to the wording of the policy. That may include legal costs, damages, loss in value or other covered losses arising from the breach being enforced.
Missing building regulations completion certificate
Where works were notifiable under the Building Regulations, but no completion certificate or competent person certificate can be produced, an indemnity policy may be used to cover the risk of local authority enforcement. This can apply to structural alterations, replacement windows, electrical work in some circumstances and other notifiable works. The policy does not prove the work was safe or compliant, and it will not usually pay for the buyer to upgrade the work voluntarily. It is concerned with the financial risk of enforcement or related loss, not the physical quality of the work.
For older works, the enforcement risk may be lower, but the age of the works, the nature of the alteration, the lender's requirements and the current section 36 enforcement position all need to be checked before assuming indemnity insurance will be enough. Where the alteration is significant or recent, some lenders may prefer regularisation, further evidence or a professional report rather than indemnity insurance.
Restrictive covenant breach
Some flats, or the buildings they sit in, are affected by restrictive covenants in the title. These might restrict business use, subletting, alterations, extensions, conversion or other forms of use or development. Sometimes the covenant is old, the beneficiary is unclear or the practical risk of enforcement appears low. An indemnity policy can cover the financial risk that someone with the benefit of the covenant later seeks to enforce it. These policies are often accepted where the risk appears historic and dormant, but the facts matter. If the beneficiary is known, nearby or already aware of the breach, insurance may be harder or impossible to obtain.
Missing or untraceable freeholder
Where the freeholder has effectively disappeared, ground rent may not be demanded, receipts may not be available and consent cannot be obtained for matters that require landlord approval. An absent landlord or missing freeholder indemnity policy can cover the risk that the freeholder, or a successor, later reappears and makes a claim, for example for unpaid ground rent or breach of lease obligations.
This is not always a complete solution. Some buyers and lenders remain cautious where the freeholder is absent, especially if lease extension, major works, insurance, management or consents are likely to be needed. Our guide on selling a flat with a missing freeholder covers the wider picture, including the possibility of applying for a vesting order where a statutory lease extension is needed and the freeholder cannot be found.
Indemnity Insurance or Retrospective Consent?
When a paperwork gap surfaces during a sale, there are two routes. The first is to ask the freeholder (or the local authority, or the covenant beneficiary) to grant consent retrospectively. The second is to take out an indemnity policy. They are not belt and braces. You pick one. The moment you ask the freeholder, the indemnity route closes.
Retrospective consent is the cleaner answer where you can get it. It cures the legal defect. The buyer holds a proper licence, the lender is happy and the title is back in order. The catch is that the freeholder is under no obligation to give consent retrospectively and is usually free to charge for the privilege. For a knocked-through wall the freeholder will typically want a fee, copies of the structural calculations, possibly a payment to cover their solicitor and surveyor and sometimes an increase in ground rent or a deed of variation. The process can take months. For some freeholders the answer to a retrospective request is simply no.
Indemnity insurance is the faster, cheaper answer where the underlying risk really is dormant. The cost is one-off, the policy issues in days and the sale can move on. The trade-off is that the legal defect is still there, and the buyer's lender has the final say on whether that is acceptable.
The practical sequence is to ask your conveyancer to scope both routes before committing. If the freeholder is reasonable and reachable, retrospective consent may be the right answer. If the freeholder has form for being slow, expensive or obstructive, and the underlying risk is small, indemnity insurance is usually the better call. The decision belongs to the seller, on advice, and once made it cannot usually be reversed for that sale.
What the Buyer's Mortgage Lender Will Accept
Indemnity policies are a routine part of conveyancing, and most mainstream UK lenders accept them for the standard scenarios outlined above. The buyer's solicitor will check the relevant lender requirements (set out in the UK Finance Mortgage Lenders' Handbook, formerly the CML Handbook) and confirm whether a policy in the form proposed satisfies the lender.
The line tends to fall as follows. For paperwork gaps (missing building regs certificate, missing notice of transfer), historic restrictive covenants and absent freeholder cover, indemnity insurance is usually fine. For unconsented structural alterations (a knocked-through load-bearing wall is the classic case), some lenders insist on the freeholder granting retrospective consent before they will lend, because the structural risk is more than just a covenant risk: a future surveyor might value the flat below the purchase price or refuse to lend on it again.
If the buyer's lender will not accept a policy, the options narrow. The seller pursues retrospective consent (which the lender will then accept), the buyer accepts a price reduction reflecting the unresolved issue and pays cash or the buyer withdraws. This is the most common cause of an indemnity-related fall-through, and it is why scoping the lender position is part of the conveyancer's job before the policy is bought.
Cost, Process, and How the Policy Passes to the Buyer
Indemnity policies are usually arranged through one of the conveyancers, often the seller's solicitor where the seller is paying, after the buyer's solicitor has confirmed what cover is needed. The seller usually pays the premium, normally as a disbursement on the completion statement. Premiums vary by scenario and by the value of the flat being insured, but a workable range is £200 to £1,500 for the common scenarios. A simple restrictive covenant policy on a modest flat might be £200; an absent-freeholder policy on a high-value flat with no traceable freeholder can run to £1,500 or more. Structural alterations sit in the middle.
The buyer is occasionally asked to contribute, particularly if the issue surfaced very late and felt like a seller's fault. Convention is that the seller pays, on the basis that the seller created or inherited the gap and the buyer is accepting it. The TA7 form and the seller's other replies to enquiries must disclose the existence of the issue and the policy. Hiding the issue from the buyer is a separate problem and creates misrepresentation risk after completion.
Once issued, the policy usually passes with the title. The buyer becomes the insured party, as successor in title, and any later purchaser becomes the insured after them. The premium is paid once and the cover runs for the life of the title, with no annual renewal. The buyer must follow the same rules the seller followed: do not contact the freeholder, the local authority or the covenant beneficiary about the specific insured issue. Ordinary leaseholder dealings with the freeholder on unrelated matters (service charges, repairs, lease extension) are not affected.
Related Reading
The Licence to Alter guide is the natural partner to this one: it covers the retrospective-consent route, which is the alternative you have to commit to instead of an indemnity policy, not alongside it. The legal hub covers the wider legal side of selling a leasehold flat.
Frequently Asked Questions
It means their review of the title has flagged a historic legal risk (typically an unauthorised alteration, a missing certificate or a restrictive covenant) that they want covered before contracts exchange. An indemnity policy is the standard mechanism for that: an insurance bought once by the seller against the specific risk, that passes to the buyer at completion. The buyer's solicitor is not necessarily refusing the sale; they are setting the condition that lets it proceed.
Most sellers do not. You only need a policy when something on the title cannot be put right in time for completion. The common triggers are works done years ago without freeholder consent, paperwork that has been lost or a covenant with no traceable beneficiary. The policy lets the sale complete in spite of the gap; without it, the buyer's solicitor (and the lender) will usually pause.
No, and that is the part sellers find confusing. The policy does not put the legal defect right; it transfers the financial risk to an insurer. If the risk ever crystallises, the insurer pays out. The legal defect itself stays in place. Whether that is enough for your buyer (and their lender) is the practical test.
It is not usually a both-and option. Approaching the freeholder, managing agent, local authority or covenant beneficiary about the specific issue can invalidate an existing policy or stop one being issued, because insurers generally do not cover a risk once the person who could enforce it has been alerted. In practice, you usually choose between regularising the issue and insuring against it. You can discuss both routes with your conveyancer, but once the enforcing party has been contacted, the indemnity route may be lost for that sale.
The seller usually pays, normally as a disbursement on the completion statement, although the cost can be negotiated between the parties. Premiums vary depending on the value of the flat, the level of cover and the type of risk being insured. For common leasehold-flat scenarios, a workable range is often around £200 to £1,500, with simple restrictive-covenant policies at the lower end and more complex absent-freeholder cover at the upper end. Some simple policies may cost less, while a high-value flat or a complex risk can push the premium higher. The premium is usually paid once, with no annual renewal, and the cover normally benefits the buyer, their lender and future owners for the life of the title.
For the routine scenarios, yes. Missing notices, lost building regs certificates and historic covenants are usually accepted by mainstream lenders. Unconsented structural alterations are the awkward case: some lenders insist on retrospective consent from the freeholder rather than insurance, because the structural risk is wider than the legal one. The buyer's solicitor checks the lender's published requirements before recommending a policy.
Yes, and the TA6 and TA7 forms require honest disclosure of the underlying issue and any policy taken out. Disclosing to the buyer does not jeopardise the policy; disclosing to the freeholder, the managing agent or the local authority does. The two rules sit side by side: tell the buyer everything, tell the freeholder nothing about the specific insured risk.
The alternatives narrow. The seller can pursue retrospective consent (slower, often more expensive and sometimes refused), the buyer can accept a price reduction and proceed without the lender (only viable if they have the cash) or the buyer withdraws and the flat goes back to market. Where the sale is critical and the underlying issue is structural, a specialist cash buyer is sometimes the realistic route, because they will buy the flat with the defect priced in.