Buying a House With a Deed of Covenant

Some homes come with a restrictive covenant as part of their deeds. Here, we look at what that can mean and how it can affect applying for a mortgage. We also identify what happens if you breach a covenant and how you could protect yourself should the home you’re looking to buy have one attached.

What is a deed of covenant when buying a house?

A deed of covenant is part of a contract that stipulates certain terms with which the homeowner has to comply. Importantly, that covenant is written into the property title deeds, not to the homeowner specifically. It means that the covenant remains with the property. Covenants can be on both leasehold and freehold properties.

In essence, they provide legally binding assurances in the future that can protect people in various ways. For some, including a deed of covenant can be financially beneficial, as it means they may be paid fees in the future if they need your permission to extend, renovate, or use their property in specific ways.

Leasehold properties are good examples, where the lessor is paid ground rent regularly. This can also benefit landowners by protecting their land or the appearance of a property or area.

For example, a covenant can restrict how a property or piece of land can be used. It can also prevent a homeowner from altering the house, which is something to carefully consider if you want to buy a property to renovate it.

Should you buy a house with a restrictive covenant?

Your conveyancer should explain the restrictive covenant in your potential deeds and how it impacts you. It is then for you to decide whether to proceed with the purchase. Some covenants may not affect or bother you or your future use of the property. Some may be a dealbreaker.

Here are some common reasons you may not want to continue with the purchase:

Stopping renovations and alterations

One of the main reasons that covenants first came about was to prevent buildings and land from being built upon or altered in the future. So, if you want to renovate your house, you may need to seek permission first. Covenants of this nature are common amongst listed homes. You may also find that covenants can stop buildings from being converted to flats.

Additional fees

Housing developers are increasingly incorporating restrictive covenants into their deeds. Sometimes, these covenants can be as innocuous as not putting up satellite dishes outside of properties to help maintain the look and feel of a new development.

However, sometimes, developers insert covenants that require owners to pay a fee for various reasons. For example, you may have to pay if you want to extend your home.

Preventing business

Many covenants were introduced to stop particular business activity on the premises. If you are considering using your home or land for business, you’ll need to ensure that you can do so legally if you have a covenant like this.

Easements

Easements are when a person has some right over a property they do not own. It is usually regarding a right of way so a person can cross the property to get to their land. As with all covenants, your solicitor must explain the specific details of an easement restriction. They can vary with respect to how that access is provided, i.e. via foot or car.

As you can see, covenants cover many issues, with the subsequent ramifications varying dramatically. Before exchanging, you must be sure you are happy with your specific property’s covenants. Once after the exchange date, you must comply with the covenants in your deeds.

How could a restrictive covenant affect your mortgage?

A restrictive covenant can reduce the options available for mortgages. Providers will see a restrictive covenant as an increased risk, making them less likely to extend their loan. It means that you may have less favourable terms from which to choose. That could mean you then require a larger deposit or accept a mortgage with a higher interest rate attached.

Specialist brokers will be able to direct you as to what providers to approach in such a situation. They’ll know which lenders will accept your application and offer you the most favourable rates even with a restrictive covenant on your property.

What happens if you breach the covenant?

The ramifications of a breach depend on the covenant. For example, if you have had work done that was not allowed, you may have to return the property to its original condition.

However, any breach could result in being sued and having to pay damages or legal fees.

How a broker can help with your mortgage when a covenant exists

While restrictive covenants do not prevent you from getting a mortgage, they can make the process a little more difficult. Some lenders may be more hesitant to lend on properties with such restrictions – while others will have a far more lenient approach. A broker will know which lenders are more flexible, particularly in light of your own specific circumstances.

They can prove invaluable in helping you successfully apply for a mortgage with favourable terms – perhaps lowering your monthly repayments or ensuring that you can borrow the full amount you require.

The brokers we work with have in-depth knowledge of the market, so they can best direct you to the right lender to get a mortgage despite a covenant. Contact us today so we can put you in touch with one.

How can you protect yourself against a covenant?

If you want to proceed with your purchase, you can either seek a declaration from the lands tribunal that deems the covenant invalid or buy legal indemnity insurance.

Legal indemnity insurance can protect you should anything go wrong with regard to the covenant in the future. For example, suppose you decide to build on your property or extend it but cannot find a person who can permit it according to your covenant.

In that case, your insurance could protect you against that technical breach. Should you be forced to demolish anything you have built, your insurance could reimburse you for the costs you have incurred for building it in the first place.

In addition to indemnity insurance, keeping your house deeds safe is critical. These documents outline the covenants attached to your property, and losing them could create challenges in the future, such as delays or additional costs during a sale or remortgage. Without the deeds, proving the terms of the covenant or ownership of the property can become significantly more complex.

However, before buying indemnity insurance or relying on the deeds, it is a good idea to work with your solicitor to ensure that every other avenue has been taken before knowingly breaching the covenant and relying on insurance. Proper legal advice can also help you better understand the long-term responsibilities tied to the covenant and ensure your deeds are securely stored for future transactions.

How do lenders deal with covenants?

No restrictive covenant will be the same, so lenders deal with covenants on a case-by-case basis. Depending on the covenant, how restrictive it is, and how that may affect the resale price, the terms providers extend you could vary.

The process is similar for remortgages. Lenders will want to ensure that you have the right paperwork in place, such as indemnity insurance, before agreeing to a remortgage.

Speak to a broker experienced in dealing with cases with covenants

Covenants do not need to cause alarm. However, they can sometimes mean you have less choice for a mortgage provider. As a result, you may find that the interest rates offered to you are higher than you had hoped, and your subsequent repayments are more expensive.

A broker can help you, as they will know the best providers for your particular property, covenant, and financial situation. They can also help save you money and increase your chances of being approved by guiding you through the application process.

Our free no-obligation broker matching service can put you in touch with a specialist advisor today who has in-depth knowledge of applying for mortgages on properties with restrictive covenants. Call us on 0330 818 7026 or make an enquiry so we can arrange for a broker to speak with you.