## **Learning Outcomes**

This article explains how risk and insurance are allocated between seller and buyer at exchange of contracts in both freehold and leasehold conveyancing. It clarifies the default position under the Standard Conditions of Sale and Standard Commercial Property Conditions, and how special conditions can shift or retain risk, particularly in new-build and in-course-of-construction transactions. It sets out the buyer’s obligation to arrange appropriate buildings insurance from exchange, the circumstances in which the seller must maintain insurance, and how dual insurance and premium apportionment operate in practice. It highlights solicitors’ duties to advise clearly on risk transfer, insurance requirements, lender expectations, and the disapplication of statutory rights to claim on a seller’s policy. It also explains how leasehold insurance structures, landlord obligations, and rent suspension clauses interact with sales of leasehold property. Finally, it examines the contractual remedies and practical consequences where loss or damage occurs between exchange and completion, enabling you to apply these rules accurately to SQE1-style multiple-choice questions and scenario-based problems.

## **SQE1 Syllabus**

For SQE1, you are required to understand the allocation of risk and insurance obligations at exchange of contracts in property transactions, with a focus on the following syllabus points:

- The default rule under the Standard Conditions of Sale (SCs) and Standard Commercial Property Conditions (SCPCs) that risk passes to the buyer at exchange.
- Buyer and seller insurance responsibilities between exchange and completion, including dual insurance and apportionment of premiums.
- Contract terms that alter the standard position, including new-build or in-course-of-construction sales keeping risk with the seller.
- Solicitor duties to advise on risk, insurance, lender requirements, and the effect of dual insurance and the disapplication of LPA 1925 s47.
- Consequences of failing to insure and available remedies.

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. When does risk in a freehold property usually pass from seller to buyer in a standard residential transaction?
2. What is the buyer’s main insurance obligation after exchange of contracts?
3. How can the standard rule for passing of risk be changed in a property contract?
4. What is the solicitor’s duty regarding insurance advice at exchange of contracts?

## **Introduction**

Exchange of contracts converts a tentative transaction into binding obligations. The parties fix the completion date and the buyer acquires an equitable interest. From this point, the allocation of risk for accidental damage or destruction is important. In standard conveyancing, risk shifts to the buyer at exchange, which has practical consequences: the buyer must put suitable buildings insurance “on risk” immediately, and solicitors must ensure clients understand how contract terms and any special conditions might alter who bears loss between exchange and completion.

> **Key Term: passing of risk**
> The legal moment when responsibility for accidental loss or damage to the property shifts from the seller to the buyer.

## Passing of Risk at Exchange

In most property transactions, the risk of loss or damage passes from the seller to the buyer at the moment contracts are exchanged.

This is the default approach under both sets of commonly used standard conditions. It means that if the property is damaged or destroyed after exchange but before completion, the buyer must still complete at the agreed price—unless the contract provides otherwise.

### Standard Contractual Position

The Standard Conditions of Sale (SCs) and the Standard Commercial Property Conditions (SCPCs) both state that the property is at the buyer’s risk from the date of the contract (i.e., exchange). The seller is under no obligation to insure the property unless the contract or a lease requires it. The modern conditions also disapply any statutory right to claim directly on the seller’s policy (Law of Property Act 1925 s47), reinforcing that the buyer should not rely on the seller’s insurance and must arrange their own cover.

> **Key Term: Standard Conditions of Sale**
> A set of pre-printed contract terms commonly used in residential property transactions, setting out default rules for matters such as risk and insurance.
>
> **Key Term: Standard Commercial Property Conditions**
> The standard conditions widely used in commercial property sales. They mirror the SCs on risk at exchange and add commercial-specific provisions, including how VAT and insurance obligations are addressed.

### Effect of Passing of Risk

Once risk has passed, the buyer is responsible for any accidental loss or damage to the property, even though legal title and physical possession have not yet been transferred. The buyer’s obligation to complete is not relieved by damage; their protection is through suitable buildings insurance.

> **Key Term: buildings insurance**
> A policy that covers the cost of repairing or rebuilding the physical structure of the property if it is damaged or destroyed.

The standard conditions also anticipate dual insurance (where both parties’ policies cover the property at the same time) and provide an abatement mechanism if the buyer’s policy pays out less because a seller’s policy also covers the risk. They further provide for limited apportionment of any seller’s premium when the seller’s policy is kept in force for the buyer’s benefit.

### **Worked Example 1.1**

Contracts are exchanged for the sale of a house. The next day, a fire destroys the property. Who bears the loss?

> **Answer:** The buyer bears the loss. They must still complete the purchase and pay the full price, even though the property has been destroyed, unless the contract states otherwise.

## Insurance Obligations After Exchange

### Buyer’s Duties

The buyer must arrange buildings insurance to take effect from exchange. This is usually a lender requirement and is essential to protect the buyer’s equitable interest. Cover should be at full reinstatement value, including demolition, site clearance, professional fees, and VAT where applicable. Policies should include an appropriate list of insured perils for the property’s location and nature—e.g., flood cover in high-risk areas, or subsidence where past or local mining is relevant.

> **Key Term: equitable interest**
> The buyer’s beneficial interest in the property that arises at exchange of contracts, before legal title is transferred at completion.

In practice, buyers should confirm with the insurer the exact point at which cover incepts (the date of exchange), and ensure any lender conditions are met as per the UK Finance Mortgage Lenders’ Handbook (e.g., minimum cover requirements and reinstatement valuation). Where a block policy is used for multiple properties, the new property must be added from exchange.

Solicitors may be asked to arrange or endorse insurance. If advising or arranging a regulated insurance contract, compliance must be secured through the professional firms exemption, and any advice must be within permitted scope.

### Seller’s Duties

The seller is not required to insure the property after exchange unless the contract or a lease says otherwise. However:

- Many sellers keep their insurance active until completion, often because their mortgage terms require continuous insurance.
- If the contract includes a special condition that the seller must maintain insurance until completion (or the seller is obliged to insure under a lease), the standard conditions require the seller to maintain the policy, allow inspection of it, and to pay over any insurance proceeds not used for reinstatement or assign rights to the buyer on completion. The buyer may reimburse a proportionate part of the premium for the period between exchange and completion if the seller’s policy is expressly kept in force for the buyer’s benefit.

### Dual Insurance

Sometimes, both the seller and the buyer may have insurance simultaneously between exchange and completion. This is dual insurance.

> **Key Term: dual insurance**
> The situation where two separate insurance policies cover the same property for the same risk at the same time.

If a buyer’s payment under their policy is reduced due to the existence of the seller’s policy, the standard conditions provide that the purchase price is abated by the amount of that reduction. This mechanism prevents the buyer being financially disadvantaged by the presence of the seller’s cover.

### **Worked Example 1.2**

Buyer and seller both insure the property. A claim between exchange and completion results in the buyer’s insurer reducing payment because the seller’s policy also covers the loss. What is the contractual consequence?

> **Answer:** The purchase price is abated by the amount of the reduction. The buyer thus is not penalised by the coexistence of the seller’s policy, and the seller may claim the abated sum from their insurer where applicable.

## Special Contract Terms Altering Risk

The default rule (risk passes to the buyer at exchange) can be changed by agreement. A common variation is for new-build or in-course-of-construction properties: a special condition may state that risk remains with the seller until completion and obliges the seller to maintain insurance.

> **Key Term: special condition**
> A contract clause that overrides or supplements the standard conditions, tailored to the specific transaction.

Where the seller retains risk, the contract should address:

- The seller’s obligation to maintain (and if requested, increase) cover.
- The buyer’s right to inspect policy terms.
- Assignment of rights or payment of proceeds if damage occurs before completion.
- Any apportionment of premium.
- The disapplication of any statutory right of the buyer to claim directly on the seller’s policy, with express assignment mechanisms instead.

This approach is more common for new-builds, major refurbishments, or where the seller retains actual control of the risk exposures.

### **Worked Example 1.3**

A contract for a new-build flat states: “Risk remains with the seller until completion.” A storm damages the property after exchange but before completion. Who bears the loss?

> **Answer:** The seller bears the loss. The contract’s special condition overrides the standard rule, so the seller must repair the damage before completion.

## Solicitor’s Duties Regarding Insurance and Risk

Solicitors must advise clients clearly about when risk passes and the need for insurance. Core duties include:

- Explaining that risk usually passes at exchange and that the buyer must insure from that point.
- Checking for and explaining any special conditions that alter the standard risk position, including obligations to maintain insurance or apportion premiums.
- Advising on lender requirements (e.g., cover limits, reinstatement value) and ensuring the client’s policy meets them.
- Warning buyers that they cannot rely on a seller’s policy: the standard conditions disapply LPA 1925 s47, and the buyer’s remedy is through their own insurance unless the contract provides for assignment of rights from the seller’s policy.
- Recording the advice in writing and confirming that cover is in place from exchange.

Where solicitors arrange or recommend insurance, Financial Services and Markets Act 2000 considerations apply. If the firm is not authorised by the FCA, the professional firms exemption must be followed, and the firm must avoid recommending specific products outside permitted scope.

Negligence risks arise if clients are not properly advised about risk transfer and the need to insure. Documentation of advice and confirmation from the client that insurance is in place at exchange are important protections.

### **Exam Warning**

> If a buyer fails to insure the property from exchange, they may have to pay for damage or destruction themselves and still be required to complete the purchase. Solicitors who do not advise clients about this risk may be liable for negligence.

## Insurance and Risk in Leasehold Transactions

Leasehold insurance frameworks differ: responsibility to insure buildings often rests with the landlord, with the tenant contributing via an insurance rent. In sales of leasehold interests:

- Check the lease to confirm who insures (landlord or tenant) and what risks are covered.
- If the seller (as tenant) is obliged to insure under the lease, they must maintain the policy until completion and, where permitted, assign rights or pay across proceeds as required by the contract.
- Where the landlord insures, the buyer should be advised that insurance proceeds are applied by the landlord for reinstatement. Tenants often benefit from rent suspension if insured damage renders premises unusable.

> **Key Term: insured risks**
> The specified list of perils the landlord (or other obligor) must insure against—typically fire, lightning, explosion, flood, storm, escape of water, impact, and other named perils, often subject to market availability and insurer-imposed exclusions and excesses.
>
> **Key Term: rent suspension**
> A provision under which the tenant’s obligation to pay rent is suspended when insured damage renders premises unfit for occupation or use, usually for the duration covered by the landlord’s loss-of-rent insurance.

Where insurance is by the landlord and damage occurs, careful attention is needed:

- The landlord is commonly obliged to apply insurance proceeds to reinstate (subject to consents and policy terms).
- Rent suspension clauses protect tenants during reinstatement.
- Uninsured risks (e.g., perils not insured or excluded) are typically the tenant’s responsibility under repairing covenants unless negotiated otherwise.

For leasehold sales, the buyer should be advised of the existing insurance scheme (e.g., for blocks of flats) and confirm that cover will continue from exchange under the lease framework. If the seller is obliged to insure the demised premises, the contract should provide for maintenance of the policy and assignment of rights to the buyer at completion, consistent with the standard conditions.

### **Worked Example 1.4**

A long-lease flat is sold. The headlease requires the landlord to insure the building and suspend rent if insured damage occurs. A fire after exchange renders the flat unusable. How is the buyer protected?

> **Answer:** The landlord’s buildings insurance should respond and the landlord should reinstate. Rent suspension under the lease applies, and—subject to the contract—the buyer can require assignment of any relevant insurance rights the seller holds (if any) and rely on the lease scheme rather than insuring the building independently.

## Remedies for Loss or Damage After Exchange

In the standard position (buyer at risk), the buyer cannot usually rescind for damage occurring after exchange and before completion. Completion must occur at the full price; the buyer’s remedy is through their insurance. The contract’s dual insurance abatement mechanism may adjust the purchase price if the buyer’s payout is reduced by the seller’s policy co-existing.

If the contract states risk remains with the seller, the seller must repair or reinstate before completion or risk breach of contract. Where the seller has agreed to maintain insurance, they must pay across proceeds not used for reinstatement or assign rights to the buyer.

In leasehold contexts, the lease’s insurance and rent suspension provisions govern practical relief while reinstatement occurs. Termination rights are uncommon before completion in sales; they must be expressly provided for and are typically outside standard conveyancing frameworks.

### **Worked Example 1.5**

A buyer fails to insure after exchange. Flood damages the property two days later. The buyer seeks to rescind or claim a price reduction.

> **Answer:** The buyer must still complete at the full price. The standard conditions put the buyer at risk from exchange. Absent a special condition keeping risk with the seller or a misrepresentation, the buyer’s only remedy would have been an insurance claim. Failure to insure leaves them exposed to the full loss.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Under SCs and SCPCs, risk passes to the buyer at exchange; the seller is under no obligation to insure unless required by the contract or a lease.
- Buyers must put buildings insurance “on risk” from exchange, meeting reinstatement value requirements and any lender stipulations.
- The standard conditions disapply LPA 1925 s47; buyers cannot claim directly under a seller’s policy and must rely on their own cover unless rights are assigned.
- Dual insurance is anticipated; if the buyer’s payout is reduced by the seller’s policy, the purchase price is abated by the amount of the reduction.
- Where a seller keeps risk until completion (e.g., new-build), special conditions should require maintaining insurance, permit policy inspection, and provide for assignment of rights or payment of proceeds.
- In leasehold transactions, confirm who insures (landlord or tenant), the scope of insured risks, and the availability of rent suspension after insured damage.
- Solicitors must advise clients about risk transfer, insurance obligations, and lender requirements and document that insurance is in place from exchange.
- Remedies depend on who bears risk under the contract; buyers at risk must complete and claim under their insurance, while sellers at risk must repair or reinstate or risk breach.

## **Key Terms and Concepts**

- passing of risk
- Standard Conditions of Sale
- Standard Commercial Property Conditions
- buildings insurance
- equitable interest
- dual insurance
- special condition
- insured risks
- rent suspension


Progressing to exchange of contracts - Insurance and risk considerations