Buying a property is one of the biggest financial decisions most people make in their lifetimes. However, when it comes to purchasing a property with a covenant attached, this decision becomes even more intricate.
From understanding the implications of the covenant, and assessing its impact on property value and future plans, to mitigating risks and securing a mortgage, there are many factors to consider. However, with careful planning, sound advice from professionals such as solicitors and mortgage brokers, and a solid understanding of the process, it is entirely feasible to successfully purchase a property with a covenant.
This guide aims to walk you through various aspects related to buying a property with a deed of covenant from a UK perspective, covering key questions such as how covenants impact the buying process, how they’re dealt with by lenders, how you can protect yourself against them, and the potential avenues to remove or renegotiate them. We’ll explore these topics to provide a comprehensive understanding and help you make an informed decision when buying a property with a covenant.
What is a deed of covenant when buying a property?
A deed of covenant, in the context of property transactions, is a legally binding agreement that places certain obligations on one or more of the parties involved.
When it comes to buying a property, a deed of covenant can be made between the buyer and the seller or between the buyer and a third party. For example, it might stipulate that the new owner has to uphold certain conditions or restrictions pertaining to the use of the property. This could include maintaining a specific aspect of the property, not engaging in certain types of activity on the premises, or even continuing to pay for a service or charge related to the property.
The terms of the covenant are often detailed in the property’s title deeds and must be adhered to by any future owners of the property unless it’s removed or modified legally. It’s worth noting that covenants can be positive (requiring the property owner to actively do something) or restrictive (prohibiting the property owner from doing certain things).
Types of covenant
In property law, there are typically two types of covenants that might be included in the deed: positive covenants and restrictive covenants.
- Positive covenants: These are promises to do something proactive on or related to the property. This might be to maintain a shared driveway, to contribute to the maintenance costs of a common area, to keep a building or part of it in good repair, or even to rebuild in the event of destruction. It’s important to note that traditionally in English law, positive covenants do not “run with the land” – i.e., they do not automatically pass onto the next owner when the property is sold. However, they can still have implications for future owners, for example, through mechanisms like a ‘chain of indemnity’ or a rent charge.
- Restrictive covenants: These place certain limits or restrictions on what the landowner can do with the property. They may prohibit specific uses of the property, such as commercial use in a residential area, or prevent the owner from building above a certain height, maintaining certain types of animals, or altering the appearance of a building. Unlike positive covenants, restrictive covenants do run with the land and bind future owners of the property, meaning that even if the property is sold, the new owners will still have to adhere to the restrictive covenant.
The nature of these covenants can have a significant impact on property ownership rights and the potential use and enjoyment of the property, so it’s essential to understand any covenants that apply to a property before purchasing it.
Should you buy a house with a restrictive covenant?
Buying a house with a restrictive covenant isn’t necessarily a bad thing, but it does depend on the specifics of the covenant and how they align with your plans for the property. Here are a few factors to consider:
- Nature of the Covenant: What does the restrictive covenant actually restrict? If it limits activities or changes that you had planned for the property (like running a business from home or building an extension), then it could be a problem. On the other hand, if it restricts activities that don’t impact your intended use of the property, it might not be a concern.
- Enforcement: A key factor is whether or not the covenant is likely to be enforced. This can depend on who benefits from the covenant, how much they care about it, and whether they are willing and able to take legal action.
- Removal or Modification: In some cases, it might be possible to have a restrictive covenant removed or modified, either by negotiating with the benefiting party or applying to the Lands Tribunal. However, this can be a complex and potentially costly process with no guaranteed outcome.
- Impact on Property Value: A restrictive covenant could potentially impact the value of a property, either positively or negatively, depending on how it affects the potential uses of the property.
- Legal Advice: Given the potential complexity and implications of restrictive covenants, it’s generally a good idea to seek professional legal advice before buying a property with a restrictive covenant.
So, while a restrictive covenant should be considered carefully, it doesn’t necessarily mean you shouldn’t buy the property. You should, however, understand the implications of the covenant, how it aligns with your plans, and the potential for enforcement or modification.
Can I get a mortgage with a restrictive covenant?
Yes, it is generally possible to get a mortgage on a property with a restrictive covenant. However, the specific covenant can sometimes influence a lender’s decision or the terms of the loan.
- Impact on property value: If a restrictive covenant potentially reduces the value of the property (by limiting what can be done with it, for example), the lender might take this into account when deciding how much to lend. They may offer a lower loan-to-value ratio or decline the loan if they believe the covenant significantly impacts the property’s value or marketability.
- Future saleability: Lenders also consider whether a restrictive covenant could make the property harder to sell in the future. If the property is repossessed, the lender will want to be able to sell it easily to recover their money.
- Risk of legal action: If there’s a risk that the current or future property owner could breach the covenant and face legal action. As a result, this could also influence the lender’s decision.
As part of the conveyancing process, your solicitor should identify any restrictive covenants and explain their potential implications. If you’re planning to get a mortgage, it’s important to discuss any restrictive covenants with potential lenders or your mortgage broker to ensure they won’t be a problem.
Disadvantages of buying a property with a restrictive covenant
Buying a property with a restrictive covenant can have several potential disadvantages, depending on the nature of the covenant:
- Limited use of property: Restrictive covenants can limit how you use your property. For instance, you might be prohibited from running a business from home, building an extension, or even parking certain types of vehicles like a caravan or boats on your driveway.
- Potential for legal disputes: If a covenant is breached, intentionally or otherwise, it could lead to legal action from those who have the benefit of the covenant. This could result in significant legal costs, stress and could even require you to reverse any changes made in breach of the covenant.
- Cost and difficulty of modification: If a restrictive covenant proves to be problematic, it might be possible to have it modified or removed. However, this can be a complex, time-consuming, and potentially costly process with no guarantee of success. It typically involves negotiating with the beneficiary of the covenant or making an application to the Lands Tribunal.
In light of these potential disadvantages, it’s essential to get professional legal advice if you’re considering buying a property with a restrictive covenant.
Which mortgage lenders accept restrictive covenants?
Typically, most mainstream lenders will consider applications for properties with restrictive covenants. However, it’s important to note that the presence of such covenants may cause the application process to take longer, as the lender will likely want to evaluate the nature and implications of the covenant.
Here is a list of some of the major mortgage lenders in the UK:
- Lloyds Banking Group
- NatWest Group
- Santander UK
- Nationwide Building Society
- Royal Bank of Scotland (RBS)
- Virgin Money
- TSB Bank
All of these lenders have processes in place to assess the impact of various factors, including restrictive covenants, on their lending decisions. Therefore, it’s advisable to consult with a mortgage advisor or directly with potential lenders to understand how a restrictive covenant might affect your mortgage application.
Moreover, it’s highly recommended to consult with a solicitor or conveyancer who is familiar with restrictive covenants and can provide advice based on your specific circumstances.
Buying land with a covenant
When buying land with a covenant, whether restrictive or positive, there are a few considerations to keep in mind:
- Understanding the covenant: The first step is understanding the nature of the covenant and its implications. It’s crucial to get a clear explanation of the covenant from your solicitor, including what it means, what it restricts or requires, and who benefits from it.
- Impact on use of the land: If you have specific plans for the land, it’s vital to ensure that the covenant does not prohibit these. For instance, a restrictive covenant might prevent certain types of development or usage, while a positive covenant might require you to carry out (and bear the cost of) certain actions or maintenance.
- Enforceability: As mentioned, not all covenants are enforceable, and the likelihood of enforcement can also vary. Factors to consider include the age of the covenant, whether the original parties are still around, and whether the beneficiary of the covenant is likely to enforce it.
- Modification or removal: As mentioned, if a covenant is problematic, it might be possible to have it modified or removed. This can involve negotiations with the beneficiary of the covenant or an application to a body such as the Lands Tribunal. However, this can be a complex and potentially costly process with no guaranteed success.
- Impact on value of land and mortgage: Covenants can potentially affect the value of the land and your ability to get a mortgage on it. Lenders may consider the impact of the covenant when deciding how much to lend or whether to lend at all.
- Legal advice: Given the potential complexities and implications of covenants, it’s generally a good idea to seek professional legal advice. A solicitor experienced in property law can help you understand the covenant, its potential impact, and your options for managing it.
In general, buying land with a covenant doesn’t have to be a deal-breaker, but it does require careful consideration and understanding. Make sure to take into account all the factors above and seek professional advice to help make an informed decision.
What happens if I breach a covenant?
Breaching a covenant can potentially have serious consequences. Here’s what might happen:
- The person or entity who benefits from the covenant (known as the ‘beneficiary’) can take legal action against you. If the court finds that you have breached the covenant, you could be ordered to undo any changes you’ve made (for instance, demolishing an extension that was built in violation of the covenant). This is known as an injunction.
- You might also be ordered to pay damages to the beneficiary. Damages are a form of financial compensation and can be substantial depending on the nature of the breach and its impact.
- If the beneficiary takes legal action against you and wins, you could be ordered to pay their legal costs as well as your own, which can add significantly to the financial implications of a breach.
- If you’re found to have breached a covenant, it could make it harder to sell the property in the future. Potential buyers might be deterred by the breach and the potential for ongoing legal issues. Even if you find a willing buyer, their mortgage lender might refuse to lend on the property due to the breach.
- It’s worth noting that restrictive covenants run with the land, not the owner. This means that even if the property changes hands, the new owner can still be held responsible for breaches of the covenant that occurred before they owned the property.
If you think you may have breached a covenant, or you’re considering doing something that might breach a covenant, it’s important to seek legal advice as soon as possible. A solicitor can help you understand the potential implications and your options for resolving the situation.
Can you renegotiate a deed of covenant when buying a UK property?
In principle, it is possible to renegotiate a deed of covenant when buying a UK property, but it can be a complex process and it’s not always possible. Here’s why:
- Any changes to a covenant must be agreed to by the party who benefits from the covenant. This might be a neighbour, a residents’ association, a developer, or some other party. They have no obligation to agree to a change and may refuse, particularly if they believe the change would be detrimental to them.
- Renegotiating a covenant can involve significant legal costs and can take time. You would likely need a solicitor to handle the negotiations and draft any necessary legal documents. There could also be costs for surveyors or other professionals if, for example, an assessment of the impact of the proposed change is needed.
- If the beneficiary doesn’t agree to a change, it might be possible to apply to the Lands Tribunal for a modification or discharge of the covenant. However, this is a complex and potentially costly process, and there’s no guarantee of success. The Tribunal will only agree to a modification or discharge if certain conditions are met, and even then, it might require you to pay compensation to the beneficiary.
- If you’re in the process of buying a property, attempting to renegotiate a covenant could delay the purchase. If the seller is not willing to wait, or if they have other interested buyers, they might decide to sell to someone else instead.
Can I take indemnity insurance against a covenant?
Yes, you can often take out an indemnity insurance policy against the potential risk of a covenant. This is a type of insurance policy that is often used in conveyancing to protect against financial losses that could arise from various types of property-related risks, including breaches of covenants.
Here are a few things to note about indemnity insurance for covenants:
- Purpose of Insurance: The purpose of indemnity insurance in this context is not to ‘cure’ the covenant or provide a licence to breach it. Instead, it provides financial protection in the event that enforcement action is taken because of a breach. It can cover legal costs and any financial loss that arises, such as a reduction in the property’s value.
- When It’s Used: Indemnity insurance might be used if there is a known breach of a covenant that hasn’t been enforced or if there is uncertainty about whether a covenant exists or might have been breached. It can also be used if it’s not possible or practical to obtain a release or modification of the covenant.
- Limitations: Indemnity insurance won’t stop someone from taking enforcement action if a covenant is breached, and it won’t prevent any non-financial consequences, such as having to undo changes to a property. Furthermore, certain actions, like seeking to modify or release the covenant or contacting the beneficiary about it, can void the policy.
- Cost and Duration: The cost of an indemnity policy can vary depending on the nature and potential impact of the covenant, the value of the property, and other factors. Once purchased, the policy usually lasts indefinitely and can be passed on to future owners of the property.
- Acceptance by Lenders: Mortgage lenders will often accept indemnity insurance as a solution to covenant issues, but this can depend on the specifics of the situation and the lender’s own policies.
How do lenders deal with covenants?
When a property has a covenant, whether positive or restrictive, mortgage lenders take it into account as part of their overall risk assessment during the loan underwriting process. Here’s a general overview of how lenders typically deal with covenants:
- The lender will want to understand the nature of the covenant and its potential implications. They will review the covenant as part of the conveyancing process and may ask for further information or clarification. They’ll be interested in what the covenant requires or prohibits, who has the benefit of the covenant, and whether there have been any breaches.
- Lenders will be particularly interested in whether a covenant might affect the value of the property, as this could impact the security of their loan. For instance, a restrictive covenant that limits the potential development of a property could potentially reduce its value.
- Similarly, lenders will consider whether a covenant could make the property harder to sell in the future. If the property is less marketable because of the covenant, this could pose a risk to the lender if they need to sell the property to recover their loan.
- If there’s a risk of legal action due to a breached covenant, this could lead to costs and complications that might affect the borrower’s ability to repay the loan. Lenders will consider this in their risk assessment.
- If a covenant is deemed to pose a significant risk, the lender might ask for a solution to be put in place before they will agree to the loan. This could involve obtaining a release or modification of the covenant, or taking out an indemnity insurance policy.
Each lender will have their own policies and criteria for dealing with covenants, and different lenders may come to different conclusions about the same covenant.
Can I remove a covenant from a property?
Removing a covenant from a property can be complex and isn’t always possible, but there are some situations in which it may be achieved. Here are the main ways you might be able to remove a covenant:
- Negotiate with the beneficiary: The simplest way to remove a covenant is by negotiating with the party who has the benefit of the covenant. If they agree to it, you can have a deed of release drawn up by a solicitor. However, this often involves compensating the beneficiary for the release of the covenant.
- Apply to the lands tribunal: In the UK, you can apply to the Lands Chamber of the Upper Tribunal to have a covenant discharged or modified. To be successful, you’ll generally need to show that the covenant is obsolete, that it doesn’t secure any practical benefit, or that it impedes some reasonable use of the land, among other conditions. This can be a lengthy and expensive process, and there’s no guarantee of success.
- Indemnity insurance: As mentioned, while this doesn’t actually remove the covenant, it can offer financial protection if someone tries to enforce the covenant. It’s often used when the risk of enforcement is deemed to be low, but it’s worth noting that certain actions, such as contacting the beneficiary of the covenant, can void the policy.
- Merger: If you manage to acquire the land that benefits from the covenant, a merger could occur, effectively extinguishing the covenant. This is often not a practical solution as it requires buying additional land, but it can be a possibility in some circumstances.
- Doctrine of estoppel: If the beneficiary of a covenant has long known of a breach and not sought to enforce it, or has implicitly consented to its breach, they may be estopped (prevented) from enforcing it in the future. This is a complex area of law, however, and you should seek legal advice if you think it may apply.
In any case, removing or modifying a covenant usually requires legal advice and possibly negotiations or legal proceedings. It’s not something to be undertaken lightly, and you should always seek the advice of a property law solicitor if you’re considering it.
How can you protect yourself against a covenant?
If you’re considering buying a property with a covenant, there are several ways to protect yourself:
- It’s important to fully understand the covenant before proceeding with a purchase. Your solicitor can explain the terms of the covenant and its potential implications for you.
- If the covenant has been breached in the past and no enforcement action has been taken, this could indicate that the risk of future enforcement is low. However, this isn’t guaranteed, and enforcement could still be possible.
- If the covenant is problematic, it might be possible to negotiate a release or modification with the beneficiary of the covenant. This can be a complex and potentially costly process, but it can provide certainty.
- Indemnity insurance can provide financial protection against the risk of enforcement action due to a breach of the covenant. It’s a relatively inexpensive and quick solution, but it doesn’t prevent enforcement action or ‘cure’ the breach.
- Given the potential complexities and implications of covenants, it’s generally a good idea to seek professional legal advice. A solicitor experienced in property law can help you understand the covenant, its potential impact, and your options for managing it.
- Be aware that a covenant could potentially make the property harder to sell in the future, particularly if the covenant restricts certain types of development or usage.
- If you plan to get a mortgage, consult with your lender or a mortgage advisor about the covenant. The presence of a covenant could potentially affect your ability to get a mortgage or the amount you can borrow.
In general, it’s important to take a cautious approach and make an informed decision when buying a property with a covenant. There can be serious consequences for breaching a covenant, so it’s important to ensure you’re comfortable with any covenants before proceeding with a purchase.
How a mortgage broker can help
A mortgage broker can provide valuable assistance when you’re buying a property with a covenant. Here’s how they can help:
- Understanding lender policies: Different mortgage lenders have different policies regarding properties with covenants. A broker will understand these policies and can guide you towards lenders who are more likely to lend on properties with the type of covenant that is present.
- Risk assessment: A mortgage broker can help you assess the potential risks associated with the covenant, including its potential impact on the property’s value and marketability. This can be useful in determining whether the property is a good investment.
- Negotiating mortgage terms: A broker can negotiate with lenders on your behalf, potentially securing more favourable loan terms than you might be able to achieve on your own.
- Application process: The mortgage application process can be complex, particularly when there’s a covenant involved. A broker can guide you through the process, helping to ensure that all necessary information is provided and that the application is submitted correctly.
- Indemnity insurance: If a covenant presents a significant risk, a broker can provide advice on solutions such as indemnity insurance. They can help you understand what these policies cover, how much they cost, and whether they’re likely to be accepted by mortgage lenders.
- Time and stress saving: Working with a broker can save you a great deal of time and stress. They can handle much of the legwork for you, liaising with lenders, solicitors, and other parties as necessary.
While a mortgage broker can provide valuable help, it’s also important to seek legal advice when buying a property with a covenant. A solicitor can explain the implications of the covenant, help negotiate changes or a release if necessary, and provide guidance on legal risks and solutions.