Deed of Covenant – What is it?

A Deed of Covenant plays a part in many conveyancing transactions and the conveyancing process is filled with legal complexities that can seem daunting and be easily misunderstood. This brief guide aims to answer the main queries that surround the Deed of Covenant and its role in a conveyancing transaction.

What is a Deed of Covenant?

A Deed of Covenant is a form of legal agreement between two parties which sets out the terms, conditions, and obligations between the two.  In the context of a property matter this is particularly relevant in the case of leasehold properties for example, between the leaseholder and the freeholder.  In this instance, The Deed of Covenant will cover a variety of obligations and responsibilities on the leaseholder to the freeholder, including ‘positive’ and ‘negative’ covenants, which we will explore in more depth later.

The Deed of Covenant ensures the new owner takes over the obligations and responsibilities from the previous owner regarding covenants relating to the property.

Those who make the promise are known as the “covenantor(s)” and those who benefit from the promise are the “covenantee”

The Two Different Types of Covenants

There are two primary types of covenants that can be established within a Deed of Covenant. These being ‘positive’ covenants and ‘negative’ covenants, also known as ‘restrictive’.

‘Positive’ Covenants are those which require the leaseholder to actively perform or carry out specific actions, often at a cost to the leaseholder. Examples can include but are not limited to: –

-Payment of ground rent and service charges

• -Maintaining the property in good repair and condition

Agreeing to larger works

• -Agreeing that external parts of the property are maintained

P     Positive covenants do not ‘run with the land’, meaning they are not passed to the new buyer on the transfer of the property. They tend to be personal to the original parties to the original deed in which the covenants were initially set out.

There may be instances where the Covenantee wants to ensure that the covenants are binding on the successors in title. If this is the case, then a separate deed will typically be entered into between the party with the benefit of the covenant and the new owners, to ensure that the covenants can be enforced. This separate deed – Deed of Covenant –  is completed simultaneously with the transfer of the land to the new owners.

‘Negative’/’restrictive’ covenants on the other hand are obligations not to do something in relation to the property.  Such covenants are often implemented to ensure that the value of the property is maintained and to also protect the interest of other tenants in leasehold properties. Examples of restrictive covenants can include: –

• -Not running a business from the property
• -Not to make structural alterations without having obtained permission from the Covenantee
• -Not to obstruct right of ways
• -Restrictions on owning pets

As opposed to Positive Covenants, negative covenants do run with the land, meaning that the benefit and the burden of the covenant will bind successors in title.

Why would you need a Deed of Covenant?

A Deed of Covenant plays a significant role as it dictates the terms of a properties use. The Deed of Covenant sets out rules that must be adhered to when living in a property and can also be used to create or amend obligations in relation to the land. For example, a Deed of Covenant for a leasehold property may establish the requirement to contribute to the upkeep of communal areas. Ensuring that the covenants contained within the Deed are understood is crucial for a variety of reasons: –

• Legal compliance – ensuring that all parties are aware of and can comply with the legal obligations set out within the Deed. This will prevent breach and enforcement action which will be discussed further later.
• Value of the Property – depending on the nature of the covenants established in the Deed, the value of the property can be affected either positively or negatively. For example, positive covenants that ensure properties are well maintained and kept in good condition will also ensure that the value of the property is maintained over the years.
• Future sales – the Deed will affect future conveyancing transactions as the covenants contained within will pass to the subsequent property owners. For example, a prospective buyer hoping to operate their business from a property will need to avoid those affected by negative covenants that prohibit properties being used other than for the purposes of a dwelling house.

What is a Deed of Covenant on a Leasehold property vs a Deed of Covenant on a Freehold property?

Most obligations relating to leasehold property are typically contained within the Lease itself. When Leasehold property is sold or transferred, the new owner will become a successor in title of the previous leaseholder (the ‘tenant’ for the purposes of the Lease). As a result, there is a minimal need for a Deed of Covenant in the case of Leasehold title, as both negative and positive obligations are contained within the Lease. However, in some cases, the Landlord may require that the new owner of the Leasehold title enter into a Deed of Covenant within which they will promise to observe conditions of the lease and perform the tenants’ obligations.

Nowadays however we also regularly see the requirement for a Deed of Covenant on estate developments which include both leasehold AND freehold properties where there are communal/amenity areas requiring the owners of these properties to contribute towards the maintenance and upkeep by way of service charges paid to a management company. Therefore, a Deed of Covenant is often requiredwhen purchasing a freehold property on a development.

How do you get a Deed of Covenant?

If a Deed of Covenant is required in a conveyancing transaction, the sellers’ solicitors will often provide a draft copy to the buyer’s solicitors to review and approve.

Alternatively, the freeholder may have a standard version/proforma which they may prefer to be used to ensure uniformity with other properties. The buyers’ solicitors will then prepare the Deed using the prescribed wording to be executed by the buyer.

To become a valid ‘Deed’, it must be a written agreement, signed by the parties, witnessed by an independent witness, and delivered to the other party (dated). If the requirements are not met, then the Deed of Covenant is not enforceable. When a Deed of Covenant is delivered, both the positive and negative covenants are passed from the seller to the new buyer and leaseholder.

What is the cost to obtain a Deed of Covenant?

The costs involved in the preparation of a Deed of Covenant vary. Additional Fees may also be incurred by the management company or landlord for updating their records and therefore fees vary from company to company. The responsibility for covering these costs is often subject to negotiation between the buyer and the seller but it is generally accepted that the purchaser covers the cost of the preparation of the Deed and associated notice/registration fees.

How long Deed of Covenants last?

If no time limits are stipulated within the Deed itself, then covenants could last indefinitely. Some covenants may become obsolete due to the passage of time. In this instance, they are capable of being disregarded. If the requirements of specific covenants have been met and discharged, or parties have agreed to release the signed Deed of Covenant, this would enable them to also be disregarded.

What happens if you breach a Deed of Covenant?

If you breach a covenant established in the Deed, then the covenantee can take legal action for breach of contract.

Following a breach, the covenantee can seek an injunction to prevent further breaches and/or seek damages for financial loss which has stemmed from the covenantors’ failure to comply. The Covenantee can also pursue a claim for specific performance of the covenant.

A common solution that is often sought, is for the breach to be remedied. For example, if you built a conservatory which in turn breached a restrictive covenant not to construct or alter the exterior of the building, you would effectively be ordered to remove the conservatory to remedy the breach and return the property to its original state.

How Tollers can help?

If you have any concerns, questions or need assistance with a Deed of Covenant… Talk to Tollers on 01604 258558.  Our highly experienced Buying and Selling a Home team can help you understand your rights and obligations and guide you through the process of arranging and executing a Deed of Covenant.