What is a latent defect?
What is a latent defect? In this article, we’ll aim to answer this question and more in easy-to-grasp detail. We will cover how it can affect you as a property developer or a private homebuyer and what your rights are. We’ll also delve into whether you need Latent Defects Insurance and the protection it can provide.
What is a latent defect?
Generally speaking, when buying a house, the onus is on the purchaser to check that it’s sound. The responsibility is on the buyer to look for and pick up any problems or defects. In the UK, this is generally done by means of a survey. These can throw up issues that can be referred to as ‘patent defects’ as they are detectable with what is termed ‘reasonable inspection’.
But what is a latent defect? In a nutshell, a latent – sometimes called inherent (or even hidden) – defect is a problem with a new-build property that is not known to either buyer/renter or seller at the point of sale. It can also apply to new work at existing properties. The defect is literally hidden and may not become apparent as part of a reasonable inspection or survey.
Latent defects could involve unknown or unforeseen issues with the design, construction, materials, products or workmanship of anyone or anything involved with the build at any stage. To confuse matters further, the problems might not even become apparent until many years after completion.
How latent defects affect developers or homebuyers
Latent defects are largely structural in nature. As such, responsibility for latent defects can become a costly and time-consuming grey area.
Generally, in the case of a developer, there could be a clause in the sales or rental contract pertaining to defects, ensuring they fix any problems. However, this generally runs out after a defined period of time.
To avoid costly legal wrangling, many developers or sellers now take out Latent Defects Insurance policies. These ensure they are covered against the cost of future repairs at a completed property.
Latent Defects Insurance
Latent Defects Insurance is a first-party policy largely used for commercial property and new-builds, including housing, retail and offices. It can also be applied to new work on existing or older properties.
It largely covers structural damage not apparent upon completion of construction. Policies are typically live for a period of 10 to 12 years, but may also be extendable.
This insurance is also fully transferable throughout the lifetime of the policy. That means that if the building is sold on or re-let, all future owners have the benefit of protection during the policy period.
The policy should cover any cost to put right or repair the defect or issues caused without having to find fault or prove exactly who was responsible. This is particularly beneficial where an architect, project manager, contractor and sub-contractor might all be involved, making it hard to pinpoint who is at fault – if indeed anyone is – especially if several years have passed. This can save a lot of time and legal wrangling and makes the whole claim much simpler and quicker to manage. A latent defects policy even pays out if the negligent party has become insolvent.
Do I need Latent Defects Insurance?
If you’re buying a new build property, protection may be in place in the form of a collateral warranty or a contract maintenance period. This would mean the developer is liable for any repairs.
The problem with both of these options is that they may run out before any defect has shown up. In addition, they sometimes require proof of culpability, which can be hard – if not impossible – to obtain. This is not required for a Latent Defects policy.
Companies or individuals can also go out of business or cease trading, further complicating matters. Plus, where properties have changed hands or had multiple occupants, there could be disputes and shifted blame over when or what caused the problem in question.
This is not a problem with Latent Defect Insurance. Because it can be transferred, it can cover a developer (or house buyer) against future nasty shocks or claims, regardless of fault. It is undoubtedly an added expense that some developers might regard as unnecessary but it can help to reassure future buyers that their property is protected.
In addition, while collateral warranties do cover some issues, there may be gaps and overlaps, meaning certain conditions or areas maybe not be covered. Latent Defects Insurance means you can have peace of mind that you will be protected because cover is more comprehensive.
Who buys Latent Defects Insurance?
Latent Defects Insurance (LDI) can be purchased by a wide variety of different parties. The most common buyers are:
- Property developers: Latent Defects Insurance is required to sell properties. Mortgage providers often stipulate this as a condition of lending. It is a way of protecting their loan.
- Contractors: They are often asked to take out cover on behalf of their clients, such as housing associations.
- Property Owners: They may buy LDI when selling a home, or to protect their own interests.
- Architects: These professionals may be instructed to take out the cover by their client as an alternative to an Architects Certificate.
- Private Finance/Investors: As a means of protecting their investment.
- Receivers: In the event that a contractor is found to be insolvent, there is no right of recourse in the event of a defect.