House previously bought at undervalue: can my transaction be voided?

lb00

Hi,

I am currently in the conveyancing process for a flat that I really like. We are first-time buyers and cash buyers.

The current seller (B) bought the house at an undervalue from the previous seller (A). I understand that if the previous seller goes bankrupt, a trustee in bankruptcy can review and potentially void a transaction at an undervalue if it took place within five years of the bankruptcy petition (Section 238 of the Insolvency Act 1986).

What I am unable to understand is: if my transaction with the current seller (B) happens at market value, and if the previous seller (A) goes bankrupt, could a judge void my transaction as well and repossess the house?

Thank you for your help.

propertyrental

What does your solicitor say?

Hoenir

Creditors also have rights under the Insolvency Act. Where assets have been deemed intentionally to be placed out of reach. No time limit applies. 

user1977

lb00 said:

What I am unable to understand is: if my transaction with the current seller (B) happens at market value, and if the previous seller (A) goes bankrupt, could a judge void my transaction as well and repossess the house?

Broadly speaking, yes. Though only to the extent of the undervalue - what are the figures involved? (though bear in mind the inevitable risk if the parties were connected no matter what the price appeared to be, as the true consideration could have been something else).

You can insure against the risk. Your solicitor should be advising you on this.

Hoenir

user1977 said:

lb00 said:

What I am unable to understand is: if my transaction with the current seller (B) happens at market value, and if the previous seller (A) goes bankrupt, could a judge void my transaction as well and repossess the house?

You can insure against the risk. Your solicitor should be advising you on this.

The solicitor would relay their concerns to the mortgage lender for whom they also act. 

user1977

Hoenir said:

user1977 said:

lb00 said:

What I am unable to understand is: if my transaction with the current seller (B) happens at market value, and if the previous seller (A) goes bankrupt, could a judge void my transaction as well and repossess the house?

You can insure against the risk. Your solicitor should be advising you on this.

The solicitor would relay their concerns to the mortgage lender for whom they also act. 

There is no mortgage lender.

lb00

user1977 said:

Broadly speaking, yes. Though only to the extent of the undervalue - what are the figures involved? (though bear in mind the inevitable risk if the parties were connected no matter what the price appeared to be, as the true consideration could have been something else).

You can insure against the risk. Your solicitor should be advising you on this.

propertyrental said:

What does your solicitor say?

Hoenir said:

Creditors also have rights under the Insolvency Act. Where assets have been deemed intentionally to be placed out of reach. No time limit applies. 

The price I am paying for the house is £620,000. The price my seller (B) paid was £510,000. I have to mention that I am buying the house vacated, but it was sold to the seller with a tenant in situ. I read that having a tenant in situ can reduce the price by about 20%.

My solicitor argues that even though it's not our transaction that is happening at an undervalue but the previous one, because he can observe the previous price at the HM Land Registry, in the case of the bankruptcy of (A) (the seller before my seller), a judge could still void my transaction as well.

Yes, he mentioned insurance, but I do not fully understand how it would work. Would they still repossess the house, or would the insurance step in and pay the creditors in case of a claim?

Thank you.

user1977

Insurance would pay the creditors (or pay to challenge a claim). The creditors' claim would, as I said, only be for the extent of the undervalue, not the whole house.

How do you know the £510k was at undervalue? It might have been the market price, given as you say it had a tenant in place. Was it bought on the open market? How long ago?

If you don't fully understand your solicitor's advice - tell him! It's what you're paying for, he should be explaining it to you until you understand it...

lb00

user1977 said:

Insurance would pay the creditors (or pay to challenge a claim). The creditors' claim would, as I said, only be for the extent of the undervalue, not the whole house.

How do you know the £510k was at undervalue? It might have been the market price, given as you say it had a tenant in place. Was it bought on the open market? How long ago?

If you don't fully understand your solicitor's advice - tell him! It's what you're paying for, he should be explaining it to you until you understand it...

Thank you so much. Given the situation, if I am insured, what risks am I effectively facing?

I believe the previous transaction is at undervalue because the sale happened just 4 months ago, and property prices haven't significantly increased since then. The only plausible explanation for the price difference might be the tenant in situ, but I'm not sure if that justifies such a large discrepancy.

It would obviously be a nightmare to lose the house even if I got the money back, as I also plan to do some light renovation to the bathrooms.

DullGreyGuy

lb00 said:

user1977 said:

Broadly speaking, yes. Though only to the extent of the undervalue - what are the figures involved? (though bear in mind the inevitable risk if the parties were connected no matter what the price appeared to be, as the true consideration could have been something else).

You can insure against the risk. Your solicitor should be advising you on this.

propertyrental said:

What does your solicitor say?

Hoenir said:

Creditors also have rights under the Insolvency Act. Where assets have been deemed intentionally to be placed out of reach. No time limit applies. 

The price I am paying for the house is £620,000. The price my seller (B) paid was £510,000. I have to mention that I am buying the house vacated, but it was sold to the seller with a tenant in situ. 

When was the sale to B?

Are you aware of them having done anything to the property other than turfing the tenants out? Our last rental was marketed at £650,000 and sold for £510,000... the LL was in financial difficulty but still held out 12 months for a sale. Haven't seen it back on the market but the mirror flat (in better state of repair) is currently on the market for offers over £700,000 5 years later. 

user1977

lb00 said:

user1977 said:

Insurance would pay the creditors (or pay to challenge a claim). The creditors' claim would, as I said, only be for the extent of the undervalue, not the whole house.

How do you know the £510k was at undervalue? It might have been the market price, given as you say it had a tenant in place. Was it bought on the open market? How long ago?

If you don't fully understand your solicitor's advice - tell him! It's what you're paying for, he should be explaining it to you until you understand it...

Thank you so much. Given the situation, if I am insured, what risks am I effectively facing?

None, that's what the insurance covers.

Do you not know whether the previous sale was on the open market or not? Are you buying from one of the "we buy any house" type outfits?