Buyer beware - or get insurance

Like people, every house title has history. Sometimes there are hidden "title" problems, which mean you've not bought what you thought you had.

People often think the "title" is a certificate. The "title" is in effect a bundle of rights. If you have the title it means you have the rights to use the property. Your title certificate is a collection of documents that simply proves you have those rights.

Having a "clear title" is important when buying a property. Defects arise far more often than people expect and the fallout can be quite stressful, says solicitor Jonathan Flaws of Sanderson Weir.

Buyers sometimes purchase knowing there are title issues. But just as often they're unaware of defects such as unknown liens (rights over the property until a debt is paid), easements (rights by others to use your property), undiscovered encumbrances (impediments that lessen a property's value), boundary disputes, fraud and other issues.

If your lovely new home turns out to have title defects it could cost a whole lot of money to sort out. That's one good reason to hire a lawyer before signing on the dotted line of a sale and purchase agreement. Increasingly lawyers are encouraging Kiwi clients to take out conveyancing insurance to cover title defects.

These defects are so common that even Flaws himself had a problem with "encroachment" on his current home's title. Once the property sale had settled, the vendor told Flaws: "of course you realise that the front three metres is on the road reserve".

"There was no (Auckland Council) GIS viewer when I purchased and I could not have discovered the encroachment without getting a survey done, which very few, if any, purchasers do," he says.

It's not beyond the bounds of possibility that at some time in the future the council will want to widen the road, says Flaws and his retaining wall will need to be rebuilt.

Now that he's aware of the risk, he has taken out a policy which covers him or any future owners for the cost of rectifying the problem. Flaws can't claim on the insurance just because he wants to put a new retaining wall up. But if the council forces him, the insurance policy pays out.

Mortgage broker Campbell Hastie of Go2Guys points out that title defects can make it difficult to get a mortgage. For example, the ANZ required one of Hastie's clients to get "solicitor confirmation" that a stormwater easement wasn't going to affect the value of a particular property before it would mortgage the property.

Another client who was looking at a property in Huntly found a handwritten note very hard to decipher but was a still-in-force mining easement from 1891. In both cases the buyers were at risk that at some point in the future the property could be dug up.

Jeff Williamson, principal of Mainprice King, which offers the conveyancing insurance, says it covers any legal issues related to the property title and LIM.

Williamson quotes the case of an elderly Tauranga couple who had been defrauded of their title in 2002 as a result of a buy-back scam. They were entitled to compensation from the Registrar General of Land (RGL) in New Zealand, but this wasn't enough to cover a mortgage that had been arranged on the property by the fraudsters.

Williamson points out that conveyancing insurance would also have helped recompense the legal costs and the shortfall of the mortgage faced by the couple.

Flaws points out that people pay a significant sum of money every single year for house insurance against the risk of their house burning down and conveyancing insurance simply protects against another risk to their house that could cost money to rectify.

Conveyancing insurance allows buyers to insure against both known risks, as Flaws did, and unknown risks. Williamson says there are 32 different kinds of unknown risks.

In Auckland's property market with most sales going to auction, buyers risk buying unseen title problems. Flaws cites the case of a young woman who bought a property with title issues.

"Immediately before the auction, the auctioneer advised that the second toilet and the garage to bedroom conversion did not have permits so the sale would be a sale without warranties as to this problem. Neither of these issues would show on a LIM."

Conveyancing insurance is not a panacea for all potential issues, nor does it take away the need for a building survey or a LIM report, says Williamson.

In addition to conveyancing insurance, some lawyers also include $100,000 of unknown risk cover as part of their service for residential transactions when doing conveyancing as part of their service says Williamson.

RGL compensation scheme: http://tinyurl.com/LINZcompensation