In Australia and New Zealand, robust laws and regulations exist that govern how land and buildings can be used or developed. Planning risk is a key consideration in any commercial real estate transaction. Title insurance can be used to help protect sellers, buyers and lenders from financial losses arising from select planning risks.

What is planning risk?

”Planning risk” is a multi-faceted concept, but is commonly used to refer to a situation where a property being sold, bought or borrowed against does not comply with applicable planning laws or regulations.

Some commonly insurable planning risks include:

• Structures having been built or altered without the required planning permits.
• Planning consents or occupancy permits not having been obtained for the current use of the property.
• Historical non-compliance with obligations contained in planning permits and associated planning agreements.

These issues may be discovered during due diligence or disclosed by the seller during a transaction.

How can it impact on a sale or purchase?

Planning risk can affect both sellers and buyers of real estate.

For sellers: these risks can impact on the market value of the property, resulting in a reduction in sale price. Buyers may also insist on the rectification of a planning issue or defect as a pre-condition to closing, causing increased cost to the seller and potentially delaying the transaction.

For buyers: as a general rule when purchasing property, buyers inherit planning risk, including the risk of future enforcement action by the local authority. This could result in costly works to remedy the issue, fines, restrictions on use of land or, in severe cases, a need to demolish buildings on the land. In some instances, this may have a significant impact on the market value of the property.

How can title insurance help?

Title insurance is a cost-effective way to manage elements of planning risk.

It protects against financial losses arising from enforcement action from the local authorities, including the cost to regularise the position. In more severe cases, if the property must be demolished or its current use stopped, the policy will cover any loss in market value.

The policy can be taken out by the seller, with the benefit passing to the buyer (which may help to maximise sale price). Alternatively, it can be purchased by the buyer to help provide peace of mind regarding insurable planning risks.