This article was originally published in Property Week, on 2 September 2011.
Authors: David Sinclair and Gary Boon, head of CCV Risk Solutions' Jersey Team.
Need to know: how to cash in on a Jersey trust
Before the government closed a tax loophole on 22 March 2006, there was a rush of property investors that put properties into Jersey property unit trusts (JPUTs) to avoid stamp duty land tax.
Many JPUTs had an anticipated lifespan of about five years, so now there is a wave of owners that want to sell them.
However, many sales are running into problems. The main concern for a buyer will be the actual and historic liabilities of these JPUTs. The seller is not obliged to disclose information about the trust — the principle of “buyer beware” applies — so the sale-and-purchase agreement (SPA) will contain a list of warranties that the seller is prepared to give the buyer in respect of the JPUT’s financial, legal, tax and other positions.
The seller will aim to achieve a “clean break” from any prospective warranty claim at the earliest opportunity. It will be important for the buyer to ensure there is recourse to a fund with the financial capacity to meet any breach of warranty claim for the full period of warranty cover. This can frequently lead to an impasse in negotiations between buyer and seller.
One solution for the parties that has become more popular is warranty and indemnity insurance, which can be tailored for each transaction.
There are two types of warranty and indemnity insurance: a seller’s policy, which is put in place by a seller to provide cover should a warranty claim be made subsequently against the seller; and a buyer’s policy, which gives cover solely to a buyer that wishes to take action should a breach of warranty claim arise.
Typical features of these insurance polices are:
Due diligence The insurers will want to rely on the warranties given by the seller of the JPUT and will expect to be able to rely on the due diligence undertaken by the buyer’s advisers.
Exclusions Insurers will often exclude liability for a breach of specified warranties, such as environmental warranties, although cover will sometimes be available for an extra premium.
Limitations A policy’s limit of cover will usually be based on the limit of warranty cover under the SPA. However, insurers will only limit the cover to a proportion of the potential exposure under the SPA.
Excess A claim under a warranty and indemnity policy will usually be subject to an excess to ensure that due diligence has been undertaken seriously by both the buyer and the seller. However, in certain circumstances a nil excess policy may be available for an added premium.
Single premium A warranty and indemnity policy can be obtained for a one-off premium payable on the inception of the policy.
Duration Most warranty and indemnity policies will last for the duration of the warranty cover under the SPA, up to a maximum of five years.
The premiums for warranty and indemnity policies will be charged at a percentage of the cover they provide but, depending on the complexity of the warranties, the risks taken by the insurers, the excess and the level of due diligence benefiting the insurers, premiums can range from between 1% and 3% of the level of indemnity required.
Where a seller of a JPUT is looking for a “clean exit”, or where a buyer is concerned that the seller of a JPUT will not be capable of satisfying warranty claims following a sale, a warranty and indemnity insurance policy can offer a credible solution.
That solution will come at a cost and subject to conditions, but those considerations are often acceptable to both parties because it ensures a sale process that would otherwise terminate can proceed.
By David Sinclair, head of the real estate team at law firm Norton Rose Group’s London office, and Gary Boon, head of CCV Risk Solutions’ Jersey team.