Coping With Covenants - 11/07/11
Scott Hendry, National Development Manager at Auction Finance Limited discusses the minefield of property covenants and advises property investors to do their research before buying.
Simply speaking, a covenant is basically a legally enforceable agreement to do, or not do, something on (or to) a property. It is a private agreement between land owners that dictates how a property can - or can not - be used and/or developed and can pass from owner to owner though each matter will depend on its' own factors.
Restrictive covenants can be imposed by landowners that are disposing of property and wish to retain future control over what happens to it. Landowners can put whatever restrictive covenants they want on the land they are selling, although the terms have to be reasonable and capable of being adhered to.
Auction experts strongly recommend that property investors conduct thorough research to establish whether or not any covenants are in place on a property before making a bid. This kind of due diligence can avoid significant expense or serious restrictions of subsequent development plans.
Auction Finance Limited attends auctions across the UK and come across all manner of unusual covenants that dictate how property can be used.
Here are just a few of the covenants that we have seen:
- Cars/caravans can not be parked at the property
- Rubbish bins at the property must be hidden from street view
- The owner does not have the right to access the property - vehicles can not be taken from the public highway to the plot of land
- Nothing can be built within three feet of the border
- No alterations can be made to an existing property without obtaining consent for the appropriate third party, which will often be the original builder
As demonstrated above, some of the restrictive covenants we see on properties are extremely unusual and make you wonder why they were put in place. However, even if they seem ridiculous, they may be legally binding and if so, must be followed. It may be the case that if you buy a property with a restrictive covenant at auction, it may have an expiry date. If the date isn't too far into the future, this means investors may be able to secure a bargain at auction and then hold on to the property and carry out the re ovations or reconstruction when the covenant expires.
The key is getting all the facts about a property early on so that you can make an informed decision about whether you want to buy.
Restrictive covenants are an encumbrance and are registered at the Land Registry. They will be noted within the title of the property. It should be remembered that covenants can pass from one owner to another, though each matter must be considered on its own facts. Although developers often look out for them when buying residential property, restrictive covenants are commonly registered against commercial property in particular. Covenants can restrict the height of structures or forbid the opening of certain businesses, for example, the business must be appropriate if it is to be near a residential area.
It is important to check out any covenants on a property at the earliest stage possible. Many auction investors, who have gone ahead despite knowing what is in place have had cause to regret it as they have been taken to court for breach. It may well be the case that you can modify or discharge the covenant but every case is different so check this out before you buy.
Always ask you legal representative for advice if you're unsure what is in place and the legal pack isn't clear. It's vital property investors realise that old laws might still restrict the use of new land, however outdated they may seem. If you have bought a property and realise there is a covenant in place, don't despair as there are ways of overcoming them and they may well have an expiry date. The best advice is to read the legal pack with a fine tooth comb before bidding at auction and speak to your legal advisor for advice about overcoming obstacles to your development plans.
There are also specialist insurers available which can cover the eventually that a covenant is enforced. However, before the insurer will agree to cover any potential risk they will require detailed information from your legal representative, although your solicitor may be able to ensure that the seller will cover the cost of the premium.
