Covenants – My Case Study

The subject of covenants is very much a legal one. Although I studied Commercial Law as part of my MBA I have no formal legal training or legal qualifications in property conveyancing – whatsoever – so this information is purely based solely on my own personal case-study experience. This content is not offered or implied as any form of legal advice or legal guidance whatsoever on behalf of myself or the NRLA.

What is a Covenant?

To put it simply, a covenant is a legal obligation written into the deeds of a property, which rules what you can and cannot do on the land. As an active developer, covenants are something you are likely to encounter and they create certain challenges and uncertainties when purchasing.
There are two types of covenants: positive and negative.

Positive covenants are usually obligations to do something to the land, such as building or maintaining a fence, or contributing to maintenance.

Negative (also known as restrictive) covenants prevent things being done on the land. They can range from restriction on activities such as keeping animals, to restrictions against trade or business on the property.

Restrictive covenants are fairly common and are found on title documents of property and land. They can be newly created and placed on new properties, and they tend to already exist on older ones. Often, they will have been imposed by a previous landowner to prevent future owners from using or developing land in such a way that the previous landowner feels could be inappropriate or damaging.

As a purchaser of the property, you will inherit and be bound by any covenants that already exist on the title. In the case of older covenants, the person with the benefit of the covenant and ability to enforce it may not be easily traced, and so you may find that there are no repercussions for breaching them. The risk, however, remains. As a very general rule, the older the covenant, the lower the risk.

From my experience, the presence of a restrictive covenant isn’t a deal breaker. In order for a covenant to be enforceable, there must be both land which is burdened and land which is benefited. If the meaning of a restrictive covenant, or the extent of the land benefiting from it, is unclear, it is possible to make an application to court for it to be determined under section 84(2) of the Law of Property Act 1925.

The rules about how the benefit of a covenant can be transmitted from one owner to another are not straightforward. However, the most usual way is to show that the benefit of the covenant has been “annexed” to the benefiting land.

If a breach has continued for a long enough period without any objection being raised, it may be treated as having been abandoned under the Principle of Estoppel. The leading case to support this is Hepworth v Pickles [1900]. In that case, the breach had continued for 24 years before an attempt was made to take enforcement action. In later cases, a shorter period has been accepted by the Courts; 20 years is now generally considered acceptable.

Indeed, the Council of Mortgage Lenders (now known as “UK Finance”) states at point 5.10.2 of its Mortgage Lenders’ Handbook (a set of standard instructions to conveyancers) that, provided the breach has subsisted for more than 20 years, you are satisfied that there is no risk to their security, and there is nothing to suggest enforcement action is being taken or threatened, then the lender will not insist on indemnity insurance (see below).

The majority of covenant problems you encounter when buying any property can usually be resolved by taking out specialist insurance to insure against any future covenant claims that are brought after your purchase. Many lenders will accept this, and the insurance should not normally affect any future resale should you decide to flip the property. In fact, insurance is generally the cheaper and most common option in many cases, and this was true in the case of my purchase of Henley Road.

Where a covenant has been breached, or it appears still to be binding, and it is not possible or practical for it to be removed or modified, nor does the rule in Hepworth v Pickles [1900] apply, then it may be possible to obtain indemnity insurance. This insurance provides cover against loss sustained by the insured as a result of a legal risk.

In the case of a breach of covenant, this means the insured would be compensated against loss, such as loss of value to his property, the costs of remedial works or the cost of legal action, should the beneficiary attempt to enforce the covenant.

In order to agree to offer cover, the insurer will need the conveyancer to confirm that certain conditions are met. Usually the conditions are that the breach has continued for at least 12 months, the property has been used for residential purposes for the last 12 months and will continue to be so used, and there is no evidence of enforcement action being taken.

If these points are satisfied, a policy can be obtained online. If they are not, and even where insurance is required in respect of a contemplated future breach, then it may still be possible to obtain a bespoke policy, though the premium will generally be higher.

Other solutions, which I did not consider and were less desirable in my case, may include contacting the person with the benefit of the covenant or their successor in title to see if they are willing to ‘retrospectively consent’ to the breach or release the covenant entirely.

It may be difficult in practice to find the right person. Even if you do, and they actually agree to lift the covenant, they will likely seek some form of payment from you for breaching the covenant, and you will almost certainly have to pay costs for the release or consent.

It is very important not to contact anyone who may have the benefit of the covenant as this would potentially void any insurance policy that you wish to obtain. If you already have indemnity insurance in place, then you must not subsequently contact the person with the benefit of the covenant as this will void your insurance policy.

The main issue is to remember that it is all about the practical enforcement of covenants, how they may affect the future value of the property, and your ability to raise finance.

Restrictive covenants often cover a range of issues, but the most common ones include not erecting buildings or structures on the land, or not using the land or dwelling to run a business. These are also the most frequently broken, with alterations made to an existing dwelling or dwellings being used for trade or business when the covenant states the property is to be used as a dwelling house only.

If the covenant says the house must be used as a private dwelling only, then your lender may have an issue with this. If that is the case, you can offer to insure this risk. I know Kent Reliance Mortgages recently accepted this insurance for another developer friend of mine, but I cannot speak for any other lenders.

Other examples might relate to boundaries, where a neighbour wants to erect a boundary fence of a certain height but the restrictive covenant does not permit this, or restrictions on houses being rented for financial gain, or limitations on home and garden improvements.

How Do I Know if I am Affected by Restrictive Covenants?

If you purchase at auction, read the legal pack carefully. Your solicitor will do a full title check and should advise you if there are any covenants on the property that will affect your use and enjoyment of it. They will also ask the seller to confirm that they have not breached any covenants so that you do not inherit their breach.

It is important to use specialist property solicitors who are fully aware of the law surrounding restrictive covenants. I can recommend several forms I have previously used with this specialty.
In my case, after reading the legal pack during my auction purchase for Henley Road, I discovered a covenant issue, but I was totally confused and unsure of the practical consequences. To be safe, I employed a specialist consultant solicitor with extensive experience in dealing with restrictive covenants.

Breaching a Restrictive Covenant

The enforcement of covenants is complex. Your solicitor may spot that the restrictive covenants which appear within the deeds or legal title of a property have been incorrectly drawn up, or they may discover that the correct procedures have not been followed, or that the covenant simply is not enforceable.

In some cases, there are legal ways you can highlight that a covenant is not enforceable. In my case with Henley Road, my dwelling had already breached the covenant, but because the property had already been built on the land for well over 20 years, this meant the covenant was not enforceable. This also benefitted me in terms of insurance.

Ultimately, though, it is the lender who decides what is acceptable in terms of risk. In terms of guidance from the Council of Mortgage Lenders, various lenders have different requirements, which you can search for on the CML website.

In the case of The Mortgage Works, their policy on breached covenants in their own handbook stated:

‘’5.11 Restrictive Covenants 5.11.1 You must enquire whether the property has been built, altered or is currently used in breach of a restrictive covenant. We rely on you to check that the covenant is not enforceable. If you are unable to provide an unqualified certificate of title as a result of the risk of enforceability you must ensure (subject to paragraph 5.11.2) that indemnity insurance is in place at the completion of our mortgage (see section 9).
5.11.2 If there is evidence of a breach and, following reasonable enquiries, you are satisfied that the title is good and marketable; you can provide an unqualified certificate of title and the breach has continued for more than 20 years without challenge, then we will not insist on indemnity insurance.’’

I chose TMW for the above example as they are one of the largest lenders in the marketplace, but you can search each lender and their differing requirements on the CML website.
Often, it is only when disputes arise between neighbours that the issue of restrictive covenants springs to light. The most common way around the problem is to take out indemnity insurance, although the insurance company may impose specific requirements which must be met, such as no dispute being currently in effect or the breach having continued for several years.

My Case Study on Covenants – Henley Road in 2019

My purchase of Henley Road had a restrictive covenant actually stating that no house should be built on the land, but my house had already been placed and built over 70-100 years ago, on the very plot of land where the covenant stated it should not have been built!
The original plot was park land. Before I instructed a specialist, my solicitor told me: “99% of lenders won’t have an issue with this, as the usual solution is the get insurance to cover any future claims arising from the covenant.’’ However, I found that some lenders do not like this. I was refused funding from Landbay and Shawbrook, eventually securing funding from Interbay.
In my Henley Road purchase, I was able to secure insurance for my already breached covenant, find a lender, and complete the purchase without any implications to the future value or saleability of the property. However, I can’t 100% assure this as some lenders may change policy, and they tend to become much more selective in a recession.

So what did I learn from dealing with covenants on Henley Road?

Some lenders had issues with covenants, wouldn’t accept insurance, and refused me funding, but others had no issues, so you will have to shop around. I was initially advised by one solicitor (not a covenant specialist) that 99% of lenders wouldn’t have an issue and would accept covenant insurance, but from my experience in the buy-to-let mortgage market, this turned out to be more like 60%.

If the property has already been built on the land where it was not allowed to be built according to the covenant, and the covenant has been breached for more than 20 years, then the covenant would be unlikely to be enforceable.

I learned this based on case law from Hepworth v Pickles (1900). My specialist covenant solicitor, Keira Rawden, provided me with advice on this case law and also advised: “If a breach has continued for a long enough period without any objection being raised, it may be treated as having been abandoned under the Principle of Estoppel.”

Insurance is the most common resolution and, in my case, the fact that the covenant had already been breached meant that the insurance policy was cheaper. The insurance company informed us that because the breach had taken place many years ago, the breach was considered a lower risk. We believe the house had been built for well over 20 years on this land where no house was allowed to be built, according to the covenant.

Covenants are not usually deal breakers, and are not as complicated or as onerous to deal with as you may think. However, they are not always straightforward either. You have to take specialist legal advice and look at them on a case-by-case basis to weigh up the risk with your solicitor’s guidance.

Once you take out insurance, you should not try and contact the original covenant owner as it will invalidate your insurance. This was clearly stated in my policy as follows: “Without first obtaining our written consent (which we need not give), you and anyone who acts on your behalf must not disclose the existence of this policy to anyone other than the legal advisers of prospective buyers of your Property and/or their mortgage-lenders. This prohibits any application to court or the Lands Chamber of the Upper Tribunal for modification or release of the restrictive covenants without our prior written agreement.”

Unlike motor or home insurance policies, covenant insurance policies are transferable. If the previous owner had an existing covenant policy in place, then you, as the new owner, will not be required to take out a new policy because the existing transferable policy will be sufficient. Having a covenant already breached in my case proved to be more beneficial in terms of insurance.
Interestingly, after reading my policy and phoning Aviva Insurance to verbally confirm it, I learned that, should I decide to sell, my policy covers me if I incur any shortfall in the sale price as a result of the covenant. I was surprised that my insurance policy was so comprehensive and decided to call them to confirm it. Aviva mentioned that claims were very low in this sector, and I had guessed this must be the case, since the policy price was only £250.00.

An excerpt below from Aviva policy covering any shortfall/loss if selling:

‘’Any reduction in the open market value of the Property caused directly by your Covered Risk, where ‘open market value’ means the average of the estimates given by two independent valuers (one to be appointed and paid for by us, the other to be appointed and paid for by you) of the values of the Property on the open market assuming first that the Property is subject to a Covered Risk and second that the Property is not subject to a Covered Risk.”
In terms of the lender’s insured loss, my Aviva policy cover stated:

“Any shortfall in the repayment of your mortgage advance or loan secured by the Property caused directly by a Covered Risk, together with interest and costs, insurance premiums, legal and estate agency fees, ground rent and service charges (if applicable), following the exercise of your power of sale of the Property as mortgagee-in-possession.”

The ultimate outcome with my covenant was that it slightly restricted my lending options, which cost me a slightly higher interest rate, but it wasn’t a deal breaker or enough of a concern to make me want to cancel the purchase. According to my Aviva policy, if I was unable to re-sell the property or had to sell it at a reduced price due to the covenant, I am entitled to claim for any shortfall in value. Despite reading the policy details above, I still had to phone and speak to Aviva to confirm my cover, as I was surprised that it was comprehensive enough to effectively reduce my risk to zero for a £250.00 premium.

Below is an email (August 2019) from a mortgage broker who I do not usually deal with. I wanted to pose as a new customer to get a view from another broker outside my normal broker contacts.
Basically, they are saying it’s down the lenders’ solicitors on the day to decide if the title is marketable, and this can often mean that the appropriate insurance is sufficient to effectively make sure the title is marketable in the future.

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Hi Henry,

Thank-you for your email yesterday. I have had some lenders come back to me who would look at this. They have just said that it is subject to valuers comments. The valuer will determine the impact on the suitability of the property for lending and the conveyancer will determine whether the purchaser/owner complies with the obligation, advising the lender if any issues that may impact the lending. Conveyancer will guide us on the property.

In order to make a specific recommendation to you based upon your circumstances I would be grateful if you could complete the enclosed fact find and return to me in the freepost envelope provided or you can scan and email.

I would also require proof of income such as the last 3 months pay slips for employment and/or the last 2 years SA302’s/tax calculations for self-employment.

I have also attached our disclosure document which outlines who we are, how we get paid and the fees we charge.

Please get in touch should you have any questions. I look forward to hearing from you.

Kind Regards,

Erin Gallacher
Mortgage Consultant

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Below, I also asked the solicitor who acts for Hampshire Trust Bank, whom I had previously dealt with for mortgages, for her view of covenant insurance.

From: henry@webuyanyhouseliverpool.com
Sent: 12 August 2019 15:21
To: Melissa Tallon

Subject: Covenant insurance

Hi Melissa,

Re: Covenant Insurance Question
You may remember me as I did a few mortgages from Hampshire Trust via my companies and you acted for HTB.

I am considering doing another mortgage with HTB, but before I do it’s for a property with a breached covenant, where the property has been built since 1892 and we have full covenant insurance which my solicitor advises me should be okay. understand from case law that a covenant isn’t enforceable, if the property has been built over 20 year.

I didn’t want to make the application though until I have an idea, if HTB usually accept covenant insurance normally? As I plan to go to another lender if they do?
Appreciate you may need specifics of the insurance or covenant so this is just a general inquiry based on your experience do HTB or most lenders usually accept title insurance as I am likely to go with HTB again?

Response below:

On Mon, Aug 12, 2019 at 6:03 PM Melissa Tallon wrote:

Dear Sirs

There is no blanket yes or no response to this as HTB decide whether to proceed with a policy on a case by case basis (at the moment, they are leaning more to not accepting policies).

Kind Regards

Melissa Tallon
Partner, Head of Bridging
LIGHTFOOTS LLP
1 – 3 High Street, Thame, OXON, OX9 2BX
Tel: 01844 212 305

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This information is based on my own personal case study only, and is not offered or implied as any form of legal advice whatsoever on behalf of myself or the RLA. Content was reviewed and edited by Ms Keira Rawden, consultant practicing solicitor and specialist in legal covenants.