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Things to know when buying a property with restrictive covenants

Things to know when buying a property with restrictive covenantsWhat happens when you buy a property that has covenants imposed on it? This article helps buyers who have purchased a property with a covenant that restricts its use, the implications of a breach, and the options available to those who would like to breach it.

It is common for properties to be subject to restrictive covenants imposed on a previous sale. Such a covenant is typical of the property sold. For instance, a restrictive covenant to prevent serious alterations to be made on a property without the consent of a named third party, or keeping of animals other than common domestic animals can be made on a property. Usually such restrictive covenants do not warrant further action, unless they seriously affect the buyer’s intended use of the property. In all cases, the buyer’s conveyancing solicitor should inform the buyer about the liability for breach of covenants.

Problematic covenants

When it is revealed that a buyer’s intended use of property may be in breach of a covenant, the conveyancing solicitor has to follow certain steps. These are detailed below.

The first step is to check if the covenant is registered; since 1925, covenants that are not registered either on the charges register or as a Class D entry on the charges register cannot be enforced.  The next step is to look into the wordings of the covenant, and check if these are annexed effectively by the land and are prima facie binding. Unless it is expressly clear that the covenant is invalid, the solicitor should assume that it is enforceable and look for options where an insurance can be obtained to cover the liability of any future breach of covenant. The insurance company will need the following documents while deciding on issuance of an insurance policy:

a)      A copy of the covenant document or a copy of the exact wording of the document.

b)      The nature of the breach or details of the intended actions that may cause the breach.

c)      The date when the covenant was imposed.

d)     Is the covenant registered?

e)      The nature of the area surrounding the property. This allows the insurance company to assess the risk of enforcement of the covenant. For instance, when a restriction on conversion of a single dwelling into flats is breached, the neighbouring areas will have to be assessed to check if the properties have been converted into flats. If properties in the neighbouring areas have already been converted into flats, chances of a breach are more remote. A plan of the property in context of the properties in the surrounding locality is useful.

f)       A copy of planning permissions that allow the development to be undertaken by the client.

g)      Details about the person who has the benefit of the covenant.

Such a policy is a single premium policy and can be passed on to the successors. The lender should be consulted if a breach of contract is proposed and his approval should be obtained before removing the insurance policy. When arranging such a policy, the conveyancing solicitor should act as an insurance intermediary and is bound by the FSA. This includes issuing a demands and needs statement that sets out to explain why the policy is required and why the recommended policy meets the needs of the clients.

Other methods of dealing with covenants

When a policy cannot be obtained, the buyer should consider a solution that include obtaining consent from the person who is in benefit of the covenant, or apply to the Lands Chamber. If no practical solution can be obtained, it is the duty of the buyer’s solicitor to advise the buyer against buying the property.

Obtaining the consent of the person with the benefit of the covenant

This is hardly a practical solution, especially when the covenant was imposed many years ago. It would be very difficult to trace the beneficiary of the covenant. If the covenant was imposed  during the last 20 years or so, tracing the person may be possible, but the price for granting such a release would be prohibitive.

The person with the benefit of the covenant shall be the present owner of the land. If the covenant was for the purpose of a land, and it has now been divided into several pieces of land, consent will have to be obtained from all owners.

Application to the upper tribunal

The Lands Chamber or the Upper Tribunal has authority (under certain circumstances) to allow a modification or a discharge of a restrictive covenant. But this solution too is not easy to pursue. A county court also enjoys a similar but restricted jurisdiction.

Competition legislation and restrictive covenants

 Application to Land Agreements

A person drafting a restrictive covenant in relation to a freehold or leasehold property should be aware of the Competition Act 1998. Provisions under the Act do not allow covenants that aim to affect the trade within the UK or prevent, restrict or distort competition within the UK. Since 2011, the prohibition applies to land agreements as well, including transfers of freehold or leasehold interests together with the leases themselves. This applies only to agreements with businesses and not for residential transactions. Since, it is retrospective; the date of the covenant is irrelevant.

Photo courtesy: Wonderlane

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