This article concerns Transfers of Undervalue property.
Put simply, a Transfer at Undervalue occurs where a vendor enters into a transaction on terms that provide for him to receive an amount significantly less than the value of the asset.
The issues which this article goes on to explain will therefore affect all investors within the BMV sector and in the current uncertain economic climate may become more prevalent.
A liability may fall on an investor for up to five years after purchasing a property at an Undervalue.
Although it may be surprising, it is also possible that if someone else purchased the property at a price under market value and you subsequently purchased it from them within five years of their purchase then a potential liability may still fall on you.
If a vendor sells a property at undervalue and becomes insolvent within five years of the date of the sale then a Trustee in Bankruptcy may be able to take proceedings to restore the position to what it would have been if the Transaction at Undervalue had not been entered into i.
e.
reversing the transaction.
Alternatively, proceedings may be commenced to recover the amount of the undervalue.
This scenario is set out below: Vendor to sell to investor (you) at price of £100 000 True market value of the property is £130 000 Therefore property purchased at an undervalue of £30 000 Trustee in bankruptcy of the vendor may pursue you for £30 000 or for the sale to be reversed.
The general rule is that the value of a property is ascertained by reference to what a reasonably informed purchaser is prepared, in arms' length negotiations (where the parties are not connected and are negotiating for the best deal for themselves) to pay for it.
The argument against this may be a valuation obtained perhaps for your mortgage company that may contradict the value you are paying for the property as well as comparable evidence of other higher prices.
If the difference between the monies received and what ought to be received is "significant" then there may be a liability.
Although there is no guide for what is "significant," in my opinion, the undervalue element in the scenario above would comfortably fit in the "significant" category.
If the Transaction at Undervalue was entered into in the period of 2 to 5 years prior to the presentation of a petition of bankruptcy against the vendor and the vendor was insolvent at the time or became insolvent as a result of the transaction at undervalue then the risk outlined above could effect you.
To identify any risk you may wish to obtain a schedule of liabilities and assets from the vendor to ascertain there solvency position pre any transaction and what it would be if the contemplated transaction were completed, comparable evidence that the market place indicates that the price you are willing to pay is reasonable which may be supported by the property being on the market for a long period without selling or because it is in poor condition etc.
Your Solicitors may also wish to ensure they carry out Bankruptcy Searches against the vendor at Land Registry, obtain a Statutory Declaration of Solvency from the vendor and check the Insolvency Register.
None of these methods are certain of defeating a claim by a Trustee in Bankruptcy but may assist in contesting any action brought against you.
Any transactions entered into in the 2 years prior to the presentation of the bankruptcy petition you should be protected against provided the transaction was for valuable consideration and entered into in good faith.