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 £100,000 but the purchaser is buying for £75,000 then this would be classed as an undervalue transaction and the £25,000 could be considered as a ‘gift’. This is not uncommon in transactions amongst family members and also happens frequently in the property investor community.
In this type of situation a buyer can be put in a potentially dubious situation because if the seller is declared bankrupt within 5 years after the sale, then the property may be seized and be held by the trustee in bankruptcy. This could lead to the transaction being set aside and the purchaser being at a loss.
In situations like this it is important for the seller’s solicitor to obtain a document known as a declaration of solvency from the person who is selling. This declaration of solvency gives the buyer an assurance that the seller was not potentially insolvent at the time he/she sold the property.
Some lawyers also decide to obtain, an undervalue indemnity policy. This is indemnity insurance which is obtained by the seller to protect the buyer and assure him/her that the seller is solvent at the time of the sale. The indemnity policy provides protection for the buyer against financial loss that may be incurred as a result of a claim being made against them. The purpose of the policy is to put the purchaser back into the position they were before the claim by the trustee in bankruptcy is made.
The declaration of solvency and undervalue indemnity policy also provide protection for lenders such as banks and mortgage companies.
In my experience, when the legal action from a trustee takes place for undervalue transactions, the consequences for the person in possession of the property can be very frightening. And in situations such as matrimonial break ups, in which the husband has transferred the matrimonial home to his wife for nil consideration and then shortly after becomes bankrupt, the consequences can be even more messy. I recall one former client being denied contact with his children because his former wife was the beneficiary of a transaction at an undervalue and had to put her house up for sale when my client was declared bankrupt.
